Federal Reserve’s Bond Purchase to Continue Until a Further Progress in Employment and Inflation is Observed

For the week of 30 September 2021, the new Lebanese Cabinet formed a team responsible for handling negotiations with the International Monetary Fund (IMF), including the Finance and the Economy ministers, BDL governor and 2 advisors, headed by Deputy Premier Saadeh Shami.

It is worth noting that on October 1st, Turkey’s Karpowership contract with EDL has come to an end, as such the company will stop supplying Lebanon with electric power. Moreover, in discussing the electricity mechanism, the Cabinet requested a $200M loan to purchase fuel for Electricity du Liban, as EDL warned that Lebanon on a country level will face total blackout as well as fuel shortages.

With these developments, 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), slightly dropped by 0.21% to stand at 17.31 points by the week ending September 30, 2021 compared to the week of September 23, 2021. Meanwhile, the JP Morgan EMBI slightly decreased from 932.42 to 919.43 during the period.

In addition, the yield on the 5 years (5Y) Lebanese Eurobonds dropped by 20 basis points (bps) to end the week of 30 September at 62.30%. However, 10 year (10Y) Lebanese Eurobonds recorded an uptick of 10 basis points (bps) to end the period at 46.20%.

In the US, the yields on 5 year treasuries and 10 year US treasuries recorded a slight uptick from the week ending September 23, 2021 from 0.94% to 0.98% and 1.41% to 1.52% by the week ending September 30, respectively.

On September 29^th, Fed Bank President declared that bond purchases will be reduced, mainly “tapering the $120 billion in monthly purchases of Treasury bills and mortgage-backed securities”. In the meantime, policymakers will stick to their decision in buying bonds until a further progress in employment and inflation is observed, to meet with the Fed’s goals and as such the Fed would consider raising interest rates in years 2022-2023.

For the week of September 30, new claims for unemployment benefits rose further to reach 362,000 following the ending of government-funded aid early this month. In addition, Jerome Powell declared that U.S.’s 5.2% unemployment rate for the month of August is understated.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a downward move from 6,156 bps and 4,469 bps to 6,132 bps and 4,468 respectively.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank