Feeble Demand on Lebanese Eurobonds: Protests, Road Blocks, and Bank Closures

Lebanon’s BLOM Bond Index (BBI), a market value-weighted index that tracks the performance of the Lebanese government Eurobonds market excluding coupon payment., registered a weekly 0.99% retreat, to settle at 50.8 points in the week ending November 28th 2019. Meanwhile, JP Morgan Emerging Markets’ Bond Index (EMBI) climbed by a weekly 0.35% to close the week at 865.75 points.

However, with the ongoing protests throughout November, the month witnessed several shocks that sent the BBI to unprecedented lows, hand-in-hand with elevated Credit default swaps (CDS). For instance, the BBI fell substantially from 63.58 points on November 08th to 57.23 points by November 13th on the back of political and army statements highlighting the Khaldeh (death) incident while banks shut their doors for a full week amid road closures.

By November 19th, social rioting acts filled the streets of Beirut in protest against the then-scheduled parliament session which was postponed. The BBI therefore slumped to stand at an unprecedented historical low 49.46 points. In its turn, Lebanon 5Y CDS, an insurance against the default risk of the Lebanese government, rose by a weekly 419 basis points (bps) to highs of 2,288 bps.

In the following weeks, the BBI fluctuated to stand at 50.8points by November 28th, while the CDS climbed to 2,366 points, noting that a total of $1.5B worth of Eurobonds was settled by the central bank on the day while protesters staged a demonstration in front of the BDL.

As such, with a feeble demand on Lebanese Eurobonds, the yields on the 5 year (5Y) Eurobonds climbed from 36.7% on November 21st , to 37.05% by November 28th. Meawhile, the yields on 10Y Lebanese Eurobonds rose less aggressively over the week, from 21.3% to 21.6%.

On the counterpart, yields  on 5Y US treasuries record a marginal uptick of 1bps to 1.63%, while yields on the 10Y treasuries stabilized at last week’s 1.77%.   

In fact, the FED’s beige book out this week indicated economic outlook “generally remained positive”, while data on  Q3 GDP showed the U.S economy expanded at a 2.1% annually, compared to a lower estimate of 1.9%. However, yields were pulled back down, on the back of Trump signing two bills into law supporting Hong Kong protesters , which triggered China to threaten to“take firm counter measures”agains the USA’s interference.

As a result, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparables expanded  from last week’s 3,508  and 1,953 bps, to 3,542 and 1,983 bps this week.

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