Lebanese Prime Minister’s Resignation Drives the BLOM Bond Index to its Lowest Level since 2009

Over the past week, the BLOM Bond Index (BBI) plunged by 4.27%, to end the week at 98.01 points. The BBI was outperformed by the JP Morgan Emerging Markets’ Bond Index (EMBI) which witnessed a slower decline of 1.54%, to end the week at 795.25 points.

The resignation of the Lebanese Prime Minister, Saad Hariri, on Saturday, November 4, which was declared from Saudi Arabia shook the nation’s political scene. The speculation and uncertainty around this resignation, along with the increased tension between Saudi Arabia and Iran, pushed the demand on the Eurobonds lower. This uncertainty was reflected in the 5Y credit default swaps that escalated from 467 bps over the week to 615 bps and in foreign investors pulling away from the Lebanese safe haven investments as revealed by the medium-term Eurobonds, which took the largest hit with their yields increasing by 113 bps to 7.60%.Over the past week, the BLOM Bond Index (BBI) plunged by 4.27%, to end the week at 98.01 points. The BBI was outperformed by the JP Morgan Emerging Markets’ Bond Index (EMBI) which witnessed a slower decline of 1.54%, to end the week at 795.25 points.

Moreover, the vague political circumstances weighed also on Saudi Arabia, as reflected by the 19 bps rise in their 5Y CDS, which is mainly related to its campaign against fraud.

Yields on 10Y Eurobonds rose from 7.25%, last week, to 7.95%, reaching their highest levels in more than 5 years.  Hence, the 5Y and 10Y spreads between the Lebanese Eurobonds and their US comparables climbed from last week’s 447 bps and 490 bps to 559 bps and 562 bps, respectively.

In the US, yields on the US treasuries maturing in 5 years rose from 2% to 2.01%, while that of 10 years slipped from 2.35% to 2.33%. Thus, the yield curve is continuing to flatten, which highlights the ambiguity about the macroeconomic outlook in the US as seen by investors, in addition to the expectation of increasing interest rates in the near future. In fact, traders have favored longer-dated treasuries over shorter-dated issues on expectations of further interest rate increases from the Federal Reserve and domestic inflation staying below the Fed’s 2-percent target.

5 Year Credit Default Swaps, Mid-Prices (in basis points)

Weekly Change of Lebanese Eurobonds Prices