Eurobonds Holders skeptical as tensions arise in Lebanon

This week in Lebanon, the bonds market declined amidst security turbulences.  In fact, almost two and a half years after banks in Lebanon prevented depositors from withdrawing US dollars from their accounts, families in the country now fear a proposed capital controls law, as they continue to struggle with the country’s spiraling economy. The planned capital controls law, which is being discussed in parliament, has led to weekly protests outside the building, since April 19. On top of that, the troubling incident that happened in Tripoli, following the sinking of a boat off Lebanon coast, has led to the death of at least six people including one child. Unfortunately, poverty and unemployment rates have been remarkably growing in Tripoli, pushing locals to escape Lebanon by sea, in the objective to search for better lives.

Amid 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), decreased by 3.29% YTD to stand at 12.56 points by the week ending April 28, 2022 compared to the week of April 21, 2022. As for the JP Morgan EMBI, it retreated by 1.06% to stand at 793.69 by the end the week of April 28, 2022, compared to 802.18 at the end of the week of April 21, 2022.

In addition, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds rose by 99 and 420 basis points (bps), respectively, to end the week of April 28, 2022 at 77.99% and 59.7%.

In the US, the yields on 5-year and 10 year US treasuries retracted from 2.96% and 2.9% to 2.86% and 2.85% by the week ending April 28, 2022, thus flattening the curve. We should note that the yield curve was inverted, but is, currently, following an increasing trend. In addition, on April 11, US yield on five years reached same value as US yield on ten years, and later on, five and ten US yields were approximately similar, opposite to the usual yield curve. In turn, investors are very cautious about investments due to recent geopolitical tensions, high inflation and future Fed monetary policy.

Moreover, the Federal Open Market Committee (FOMC) stated that a half-percentage-point hike in the benchmark interest rate will likely take place after the Fed’s next policy meeting on May 3-4. Interesting to note that, the central bank hasn’t raised rates, at successive meetings, since 2006. However, regardless of the increase in interest rates to tackle down inflation, the US economy could be facing a strong risk of recession; thus maintaining economic growth would be a monumental task for the central banks all around the world. On a final note, the Fed reached consensus that they would begin by next May in reducing the Central Bank balance sheet by about $95 billion a month.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a growth from 7,404 bps and 5,260 to 7,513 bps and 5,685 bps, respectively.

5Y Credit Default Swaps (CDS)
Lebanon . .
 Source: Bloomberg

Weekly Change of Lebanese Eurobonds Prices 

Maturity Coupon in %28/04/202221/04/2022Change 28/04/202221/04/2022Change bps


Source: BLOMInvest Bank

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