Growth and Inflation Might Move Higher as Fed Announced Tapering Policy

This week, the BLOM Bond Index (BBI) followed a fast and sharp downtrend owing to multiple headwinds of domestic and regional developments. The major events were prominently political, but their impact is completely economic. Social rioting and political bickering during parliament sessions following the clashes of Tayouneh and the unforeseen rapid deterioration of Lebanese-Gulf relations, all together pushed the BBI back to its lowest levels since September 2021 after an occasional upticks were witnessed as a new Cabinet has formed and talks with IMF have started.

In more details, on September 13^th, the BBI witnessed a jump of 18.14% from 14.253 points September, 10, 2021 to 16.838 points in September, 13, 2021. This increase was mainly due to the formation of the new Cabinet. The latter followed actions to put forward Lebanon’s needed reforms that ultimately unlock the international community’s help. However, the improvement remained shaky as Tayouneh events and fast deterioration of Lebanese-Gulf relations have diminished the notable progress. Overall, Bonds’ prices will surely depend on the debt restructuring plan and negotiations with investors and as importantly on the outlook of the reform plan with the IMF.

Given these disruptions, 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), slumped by 11.27% to stand at 14.02 points by the week ending November 04, 2021 compared to the week of October 28, 2021. Meanwhile, the JP Morgan EMBI slightly decreased from 921.64 to 921.40 during the period.

In addition, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds increased by 606 and 395 basis points (bps), respectively, to end the week of November 04 at 71.42% and 53.80%.

In the US, the yields on 5 year treasuries and 10 year US treasuries recorded a slight downtick from the week ending October 28, 2021 from 1.18% to 1.10% and 1.57% to 1.53% by the week ending November 04, respectively.

This week in the U.S. market, the yields on the 5Y and 10 Y regressed as the Fed officially announced the taper policy. In details, Fed will reduce its assets purchases from $120 billion to $105 billion later this month, with purchases decreasing $15 billion on monthly basis until May 2022. The arrangement is also a monthly $10 billion reduction in Treasury purchases and $5 billion in agency mortgaged-backed securities. The Fed did not consider this policy as a tightening one but rather a strengthening of economic policy. Furthermore, the Central Bank declared that the rise in inflation is still transitory and it will be regulated once the supply constraints are eased and employment has recovered.

However, it is important to address the alarming inflation rates today. Global CPI is standing at high marks reaching pre and post the 2008 Global Financial Crisis. With the economy speeding-up, policy responses have been strongly correlated worldwide, so has been the inflation outlook.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a jump from 6,418 bps and 4,828 bps to 7,032 bps and 5,227 respectively.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank