The Lebanese economy continues to suffer while policymakers are failing to form a new government to apply the necessary reforms in order to unlock the international financial support. According to the Institute International fund, “Lebanon’s economic trajectory seems to be headed towards that of a “failed state”, like Venezuela, in the absence of real reforms”.
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), decreased weekly by 1.40% to stand at 14.75 points in the week ending January 07, 2021. Meanwhile, the JP Morgan EMBI slumped from last week’s 932.75 to 924.37 points this week.
As such, the yields of the 5 year (5Y) and 10 year (10Y) Lebanese Eurobonds increased this week from 69.40% and 53.40% to 70.50% and 53.65%, respectively.
In the US, the yields on 5 year (5Y) and 10 year US treasuries, recorded a weekly increase from 0.37% and 0.93%, to 0.46% and 1.08%, respectively. The increase in treasury yields this week is mainly due to the winning of the democrats in congress which raises hopes to revive the US economy. In fact, bond prices and yields depend strongly on the recovery of the US economy. More precisely, Atlanta’s federal reserve bank president, Raphael Bostic, said that “the economic recovery will depend on the pace of vaccine distribution”. However, the uncertainty around the new coronavirus strain can put more pressure on the market and lead to more volatility, as the time of getting back to normal life remains unclear. As such, we expect a decrease in treasury yields and an increase in bond prices in the upcoming months not only due to uncertainty about the vaccine but also about the stimulus plan. In details, The stimulus plan suggested by the congress will likely lead to inflation and a weakened dollar, which could increase the demand on the bonds market as it is considered as a safe haven for investors to protect the value of their portfolios against fall in the equity market. Hence, the correlation between treasury bonds and equity becomes more negative during the crisis, leading investors to fill their portfolios with more treasury bonds.
As such, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparables widened from last week’s from 6,902, bps and 5,246 bps to 7,004 bps and 5,257 respectively.
5 Year Credit Default Swaps, Mid-Prices (in basis points)
|Lebanon|| N/A|| N/A|
Weekly Change of Lebanese Eurobonds Prices
|Maturity ||Coupon in %||07/01/2020||30/12/2020||Change ||07/01/2020||30/12/2020||Change bps|
Source: BLOMInvest Bank