US Treasury Yields Down, on Fears of a Second Coronavirus Wave

The BLOM Bond Index (BBI) which is BLOMInvest Bank’s market value-weighted index tracking the performance of the Lebanese government Eurobonds’ market (excluding coupon payments), partly rose weekly by 6.31%  to stand at 18.43 points by the week ending June 12, 2020. Meanwhile, the JP Morgan EMBI advanced from last week’s 855.02 to 857.7 points this week.

As such, the yields on the 5 year (5Y) and 10Y Lebanese Eurobonds fell by 550 basis points (bps) and 190bps, to end the week at 95.50% and 44.5%, respectively. However, despite the continuous negotiations with the International Monetary Fund (IMF), demonstrations broke out across the country this week after the plunge of the Lebanese pound to a new low against the U.S. dollar, deteriorating the purchasing power of many Lebanese.

In the US, Treasury yields saw a dramatic drop as the stock market suffered the biggest one-day decline since March with the S&P 500 down more than 5% Thursday. In fact, investors rushed into government bonds for their safe haven, amid concerns that a new wave of COVID-19 infections is hitting some states, just as business activity is resuming. Moreover, on Wednesday, the Fed offered a forecast for the economy in the wake of the coronavirus crisis. The central bank projected an economic contraction of 6.5% in 2020, with the unemployment rate expected to be 9.3% by year-end. In addition, the Federal Reserve suggested it would not raise interest rates in the next few years, supporting flows into the bond-market. As a result, the yields on 5Y and 10Y treasuries dropped by 8 and 16 bps, respectively, to end the week at 0.32% and 0.66%.

Correspondingly, the 5Y and 10Y spreads between the yields on Lebanese Eurobonds and their US comparables retreated by 542bps and 174bps, to stand at 9,518 bps and 4,384 bps, respectively, by June 12.

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

Weekly Change of Lebanese Eurobonds Prices

Source: BLOMInvest Bank