What happened
Shares of Deutsche Bank (DB 2.07%), the largest bank in Germany, had fallen more than 11% at 11 a.m. ET today for no obvious reason, although there are a few events that could be driving the move.
So what
Over the last few days, the yield on the 10-year German Bund, which banks in the area tend to have a correlation with, had fallen from about 1.74% to 1.4%, a sharp drop in just a few days' time.
The news came after recent data showed that business activity has been slowing in the region, which is leading investors to brace for potentially slower economic growth than initially expected this year.
Additionally, large U.S. and European investment banks have recently been trying to offload corporate debt, which is resulting in losses. Deutsche Bank recently sold bonds behind one corporate buyout at $0.82 on the dollar. The situation could get worse, according to experts.
"Banks agreed to finance deals months ago and we've had a massive shift in expectations," said Nichole Hammond of Angel Oak Capital Advisors, according to Bloomberg. "The uncertain economic backdrop is causing investors to be much more selective and they want to be paid more for the risks they are taking."
Now what
It's not easy to quantify the impact this corporate debt issue will have on large investment banks.
But in general, I am bullish on Deutsche Bank because the European Central Bank is gearing up to raise its benchmark interest rate for the first time in 11 years, which Deutsche Bank will benefit from. I'd also expect the bank's trading business to do well right now given all the volatility, even if initial public offering activity is way down.
With Deutsche Bank trading at less than 30% of its tangible book value or net worth, I think this sets up a decent risk-reward proposition.
