Local and Regional Political Developments Weigh down on Lebanon’s Bond Index

Lebanon’s BLOM Bond Index (BBI) dropped by a weekly 0.36% to reach 93.15 points and by 3.6% over the past 2 weeks. As for the JP Morgan Emerging Markets’ Bond Index (EMBI), it recorded a weekly rise of 0.49% and reached 768.92 points.

In fact, the plunge in Eurobonds’ prices in Lebanon can be tightly linked to both the emerging markets’ sell off following the 3% breach in 10Y yields in the US as well as the political developments in the country and the region. In details, on the 15^th of May, the US embassy opened in Jerusalem which led to dozens of Palestinians being killed and wounded in protests at the border fence between the Gaza Strip and Israel. As such, Lebanon was adversely affected as revealed by the country’s Credit Spread Default (CDS) which rose by 38 bps and the BBI which dropped by 1.7%.

Moreover, the United States and Gulf partners imposed additional sanctions on Lebanon’s Hezbollah leadership, on the 17^th of May, led a 36 bps increase in CDS overnight. On the 21^st of May, the index was pulled down as a result of Lebanon’s Ministry of Finance (MoF) exchange with the Central Bank of Lebanon (BDL) whereby Treasury Bills (TBs) held by the latter were for $5.5B worth of Eurobonds.

On a weekly basis, yields on the 5 year (5Y) dropped by 8 bps from 8.68% to 8.60%, while yields on 10Y Lebanese Eurobonds rose from last week’s 8.97% to 9.32%.

The 5Y and 10Y spread between the yield on the Lebanese Eurobonds and its US comparable widened from last week’s 574 bps and 586 to this week’s 577 bps and 631 bps, respectively.

Worth mentioning, investors’ preferences have shifted towards shorter maturities as the yield curve flattened which led to some recovery in the Eurobonds prices with maturities less than 5 years. Hence, spreads have increased again and demand for longer term maturities might pick up.

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

Weekly Change of Lebanese Eurobonds Prices