Ukraine War May Sideline Fed’s Tightening Decision

This week in Lebanon, Government endorsed the State budget for year 2022 and sent it to be signed by the President. However, Lebanon cannot be isolated from the geo-political implications of Russia-Ukraine invasion as several countries in the Middle East depend heavily on Russia and Ukraine for their wheat supply. In fact, Lebanese wheat imports may jeopardize by the war in Ukraine as it receives 50% of its wheat from Ukraine. Moreover, Egypt set to be the largest wheat importer in the world and imports more than 80% if its wheat from Russia while Yemen receives only 14%.

Amid 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), dropped by 3.53% to stand at 12.31 points by the week ending February 25, 2022 compared to the week of February 17, 2022.

In addition, the yield on the 5 years (5Y) Lebanese Eurobonds dropped by 28 basis points (bps) to end the week of February 25, 2022 at 76.02%. Meanwhile the 10 years (10Y) Lebanese Eurobonds added 118 basis points (bps) to stand at 61.30% by the same period.

In the US, the yields on 5-year treasuries and 10-year US treasuries, recorded a slight decrease from 1.85% and 1.97% to 1.84% and 1.96% by the week ending February 25, 2022.

This week, the Fed stated that implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will be a consideration in determining the appropriate pace at which to increase interest rates by Fed’s mid-March meeting. In fact, rates were about to be increased to combat the inflation and slowing economic growth. However, recent geo-political developments are going to stress Fed’s decision to reconsider tightening monetary policy as any possible energy price increase and geo-political stress would feed into consumption retrenching and slowing economy.

In fact, understanding the correlation between rising bonds yields and inflation is important. Despite the slight decrease this week, US treasury yields are still at elevated levels compared to months before. As US government bonds are widely considered to be a risk-free asset, investors tend to buy US T-bills. So, bonds prices go up as demand for them increases and the effective yield on the bonds goes down. In reverse, when interest rates are expected to increase to fight inflation investors would sell their US treasuries causing the prices to go down and the yield to go up.

Overall, global economy is set to experience an extreme challenging period as Russia’s invasion of Ukraine is likely to lead to ramifications not only for the Europeans countries concerned but also it will send widespread economic and political shockwaves across the globe.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a drop from 7,445 bps to 7,418 bps whereas the 10Y spread between the yield on Lebanese Eurbonds and their US comparable registered an uptick from 5,815 to 5,934 bps.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank