European stocks rally as investors’ nerves settle; banks up 4%, and German bond yields surge.

Investor’s nerves are settling as European stocks rallied on Tuesday, with banks up 4% and German bond yields surging. The optimism comes after Treasury Secretary Janet Yellen said the US government would backstop more bank deposits if necessary. However, uncertainty still looms amid the wipe-out of Credit Suisse Additional Tier 1 bondholders’ investments and the collapse of two US banks.

The job of bank regulators is to protect the public, not shareholders: Economist

While AT1 bondholders suffer losses, economist Carl Weinberg reminds us that the job of bank regulators is to protect the public, not shareholders. He stated, “while I feel bad about all these CoCos and AT1s who are losing their money … this is what the system was designed to do.”

European bond yields rise as the market calms.

As investor optimism picked up, European bond yields ticked higher on Tuesday. The benchmark Germany 10-year bond yield was up 17 basis points to 2.267%, with 2-year yields also higher. While the markets processed the UBS acquisition of Credit Suisse, the yield on 10-year bonds had fallen to a 13-week low of 1.923% on Monday. However, Italy’s 2-year yield was up by 13 basis points, and the yield on short-dated UK gilts added eight basis points.

The decision to wipe out Credit Suisse bonds ‘most likely’ politically motivated, bondholder says

David Benamou, chief investment officer at Axiom and Credit Suisse AT1 bondholder, suggested that the Swiss authority writing down $17 billion of AT1s as part of the bank’s emergency sale to UBS may have been politically motivated. This comes amid concerns over the impact on bondholders.

The UK posts a larger deficit than expected.

The UK recorded a £16.7 billion ($20.4 billion) budget deficit for February, higher than expected. Spending was partly fuelled by the continued energy bill support provided to businesses and households. However, total tax receipts were higher, coming in at £77.8 billion versus £72.8 billion last year. Ruth Gregory, the deputy chief UK economist at Capital Economics, suggested that changes to student loan payments had not yet been accounted for and that the full-year deficit was likely to fall below the official forecast of £152.4 billion or 6.1% of GDP. Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, believes that the ruling Conservative party would be tempted to loosen fiscal policy before the next election in 2024.

European banks are up 3.6%

The European banking sector was up 3.6%, despite concerns over the wipe-out of Credit Suisse AT1 bondholders’ investments. Stoxx 600 banks are down 13.06% the month-to-date amid the collapse of two US banks, a sell-off of US regional banks, and the UBS buy-out of Credit Suisse. EU and UK regulators have said they would maintain the established order of equity instruments, being first to absorb losses, as they attempted to rewrite bail-in rules.

Related Facts

• The US government is willing to backstop more bank deposits if necessary
• The benchmark Germany 10-year bond yield was up 17 basis points to 2.267%
• The UK recorded a £16.7 billion ($20.4 billion) budget deficit for February
• The European banking sector is up 3.6%

Key Takeaway

While investor optimism has picked up in Europe, uncertainty still looms, and the wipe-out of Credit Suisse AT1 bondholders’ investments remains a concern. The decision was most likely politically motivated, according to one bondholder. The UK recorded a higher-than-expected deficit, but total tax receipts were also up.

Conclusion

The European banking sector’s 3.6% rise is a positive sign for the region. Still, it is important to note that it comes amid concerns over the wipe-out of Credit Suisse AT1 bondholders’ investments. However, the US government’s willingness to backstop more bank deposits has eased investor nerves additionally.