Demand on US Treasuries Up, Fueled by Italy’s Political Crisis & US Tariffs on Steel and Aluminum  

Lebanon’s BLOM Bond Index (BBI) continued to drop over the week ending May 31, 2018, as it slipped by 0.31% to reach 92.86 points and by 3.9% since the beginning of May. The index was pulled down throughout May 2018 largely due to the bonds’ sell off in emerging markets (EMs) triggered by the US dollar rally which elevated costs of EM’s dollar-denominated debt thereby spooking investors. In addition, May’s  regional and local political developments, including opening the US Embassy in Jerusalem and the rioting it drove, the imposed sanctions against Hezbollah, and Trump’s pulling out of Iran’s nuclear deal were also factors that pulled down the BBI.

Meanwhile, the JP Morgan Emerging Markets’ Bond Index (EMBI) rose shyly over the week ending May 31^st, closing at 773.46 points.

The yields on the Lebanese  5 year (5Y) and 10Y Eurobonds declined by 5 basis points (bps) and 16 bps, to end the week at 8.65% and 9.48%, respectively.

In their turn, US treasuries rallied over the week, driven by heightened concerns of foreign investors regarding Italy’s unresolved political crisis which albeit fueled demand on safe haven investments. Moreover, the effect of the 0.6% jump in US consumer spending in April 2018 released this week was suppressed by renewed fears of trade wars after the US announced imposing import tariffs on steel and aluminium products from Canada, Mexico, and the EU effective June 1^st.  

As such, the 5Y and 10Y yields on US treasuries retreated by 15 bps and 18 bps to end the week at 2.68% and 2.83%, respectively.

The 5Y and 10Y spread between the yield on the Lebanese Eurobonds and its US comparable widened from last week’s 577 bps and 631 bps to this week’s 597 bps and 665 bps, respectively.

On May 18th a debt exchange between the Lebanese Ministry of Finance (MoF) and BDL was completed, with the central bank’s (CB or BDL) T-bills exchanged for $5.5B worth of Eurobonds. In fact, a similar $1.7 billion swap was also carried out in November 2017. However, the current swap operation also entailed BDL subscribing to the equivalent of LBP 8,250B in T-bills, for maturities ranging between 3 and 10 years, with a coupon rate of 1%. This will reduce the debt service by $1.4B over the life of the bills, relieving the MoF from the debt payment burden in 2018.

The new Eurobonds are issued in four tranches; two of them held by BDL following October 2017’s issuance (2028 and 2031) and the other two are new ones maturing in 2033 and 2034. In details, the four tranches will be distributed as follows:

• An additional $1B on March 2028 maturity with a coupon rate of 8%
• An additional $1.5B on November 2031 maturity with a coupon rate of 8.1%
• $1.5B maturing in May 2033 with a coupon rate of 8.2%
• $1.5B maturing in May 2034 with a coupon rate of 8.25%.

As a result, the government will be able to refinance its maturing foreign currency debt and interest payments for 2018, which total almost $4.5B, while BDL will strengthen its foreign assets.

Banque du Liban also sold $3.022B worth of Eurobonds from its portfolio this week, which exceeded the original $1B planned due to high demand by local commercial banks. The date for settlement was May 30th, and the tranches offered were as follows:

• $1.22B on March 20, 2028 maturity with a coupon rate of 7%
• $1.05B on May 17, 2033 maturity with a coupon rate of 8.2%
• $752.5M maturing on May 17, 2033 with a coupon rate of 8.25%.

It’s worthy to mention that the current market rates of the 5 year and the 10 year Eurobonds were higher, standing at 8.65% and 9.48%, respectively.

In the Eurobond sale process, the commercial banks discounted certificates of deposit in US dollars held in their portfolios to cover the cost of acquired Eurobond, while the CB also provided loans with low interest rates in Lebanese pound to the banks.  

After the two swaps and the sale, the Eurobonds remaining in BDL’s portfolio totaled approximately $4.2B (from the Nov. 2017 swap and the current one), which also represents  9.27% of BDL’s total foreign assets (excluding gold).

Weekly Change of Lebanese Eurobonds Prices