The percentage of shares out on loan rose to 3.1 per cent, up from 2.4 on Tuesday, according to the latest data from Markit. Traders betting on a lower equity price of a company borrow the shares in order to execute a short sale.
Investors have been shorting Deutsche Bank on the expectation that it will need to sell new shares in the market to boost capital, diluting the value of existing holdings, as it faces a potential $14bn settlement with the US Department of Justice. That has sent shares in the lender to a three-decade low, with the stock down 17 per cent this month.
In New York the bank’s US-listed ADR plunged as much as 7 per cent late on Thursday after a report that hedge funds were pulling their money from the bank.
Short interest remains below levels seen in early July, in the aftermath of the UK’s vote to leave the EU, when 4.4 per cent of shares were out on loan. This time last year, however, less than 1 per cent of shares were out on loan.
“You can see that trend that whenever there’s negative news surrounding Deutsche Bank, people do rush to short,” said Simon Colvin, vice-president at Markit, though he added that it’s not a “super-high committed short”.
“If there was a long-term directional play, the companies where people are betting on a longer-term decline don’t see that volatility — generally the short-sellers tend to stay in the name.”
Eight other European banks have short interest above 3 per cent, according to Markit. More than 4 per cent of shares in Credit Suisse are out on loan, making it the only large bank with relatively high short interest.
Mr Colvin added that a lot of the short interest in Deutsche was probably “more to hedge their coco exposure than anything”.
Coco bonds, or contingent convertibles, also referred to as additional tier one capital, are designed to take losses when a bank runs into trouble, and as such represent a higher level of risk than normal bonds. Some investors have gone short Deutsche shares but long their riskiest debt, which is trading at 75 cents on the euro and has this week edged close to its lowest ever levels.
Credit-default swaps, which provide investors with insurance against the risk of default on bonds, provide another way to hedge exposure to Deutsche Bank and have reacted sharply to news out of Germany this week.
The rates on Deutsche Bank’s senior and subordinated CDS spiked on Tuesday, implying a higher cost to insure, and a higher probability of default. They have since eased slightly — senior five-year Deutsche CDS is trading at 228 basis points, while the five-year subordinated CDS is at 459bp.
Last week, there were 135 new contracts on Deutsche CDS, at a gross notional size of $843m, DTTC data shows, making it the most traded bank of the week behind Standard Chartered and Bank of China. Traders said this week volumes were likely to have risen.
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