Demand on US Treasuries Up: Weak Economic Data & China-US Negotiations Impasse

Lebanon’s BLOM Bond Index (BBI) partly reversed last week’s 3.29% dip as it recorded an uptick of 1.19% to stand at 89.51 points by July 18th 2019. The improvement may be attributed to JP Morgan recently upgrading Lebanon from “market weight” to “overweight”, mentioning that “the spread widening has gone too far against [their] base case that a credit event should be averted near-term, even as FX deposit flows have shown signs of declining this year, and political impasse remains a hurdle to unlocking the $11bn of CEDRE funding to the country”. Moreover, Goldman Sachs also revealed a positive assessment of Lebanon’s sovereign Eurobonds this week, stating the bonds are “undervalued”.   

As a result, the BBI also outweighed the weekly 0.30% uptick in the JP Morgan Emerging Markets’ Bond Index (EMBI) which ended the week at 856.14 points.

In fact, the the 5 year (5Y) and 10Y Lebanese Eurobonds witnessed higher demand over the week, as their respective yields slid from 11.83% and 11%, to 11.58% and 10.77%, respectively. The 5Y CDS which reflects foreign investors’ perceived default risk by the Lebanese government, goes in line with the yields performance, given the CDS climbed up from last week’s 940 basis points (bp) to 955 bp by July 18th. This is mostly linked to this week’s parliament sessions that were set to approve the 2019 budget draft. However, hurdles including internal and external opposition to the budget’s austerity resulted in reducing the positive momentum on the draft budget for the week.

In the USA, renewed China-US trade wars, weaker than expected economic data out this week, and market anticipation of rate cuts at the FED’s July 30th meeting – all  kept treasuries in demand. In turn, yields on 5Y and 10Y US treasuries slipped from last week’s 1.88% and 2.13%, to 1.78% and 2.04%, respectively, this week, on the back of an impasse in the trade negotiations between USA and China. Moreover, the weaker than expected economic data by the US Labor Department on Claims for state unemployment benefits revealed these rose by 8,000 to 216,000 by July 13th. Meanwhile, weaker U.S. homebuilding and permits data also fell for 2 consecutive months by June 2019, thus  reflecting a softer housing market as well.   

As such, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparables narrowed from last week’s 995 and 887 bps to 980 and 873 bps this week.

Weekly Change of Lebanese Eurobonds Prices

  Prices Weekly Yields   Weekly
Maturity Coupon in % 18/07/2019 04/07/2019 Change 18/07/2019 04/07/2019 Change bps
12/04/2021 8.25 93.93 93.71 0.23% 12.22% 12.33% -10
04/10/2022 6.1 85.63 85.08 0.64% 11.58% 11.78% -20
27/01/2023 6 84.04 83.38 0.80% 11.65% 11.88% -23
22/04/2024 6.65 82.33 81.42 1.13% 11.57% 11.85% -27
04/11/2024 6.25 79.94 79.29 0.82% 11.39% 11.57% -18
03/12/2024 7.00 82.03 81.64 0.48% 11.58% 11.68% -10
26/02/2025 6.20 79.88 79.04 1.06% 11.12% 11.34% -22
12/06/2025 6.25 80.38 79.67 0.89% 10.84% 11.01% -18
28/11/2026 6.60 78.92 77.92 1.28% 10.82% 11.05% -23
23/03/2027 6.85 79.17 78.08 1.39% 10.92% 11.16% -24
29/11/2027 6.75 78.17 77.17 1.30% 10.77% 10.98% -21
03/11/2028 6.65 78.42 77.17 1.62% 10.31% 10.56% -25
26/02/2030 6.65 76.67 75.42 1.66% 10.32% 10.55% -23
22/04/2031 7.00 77.38 76.21 1.54% 10.37% 10.58% -21
23/03/2032 7.00 78.29 77.04 1.62% 10.07% 10.27% -21
02/11/2035 7.05 76.19 75.04 1.53% 10.05% 10.22% -18
23/03/2037 7.25 76.92 75.79 1.48% 10.08% 10.25% -17

 

 

 

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