U.S Treasury Yields Higher ahead With Higher Inflation and Rates Hike

This week in Lebanon, the performance of the Eurobonds market followed further downtrends amid chaos and uncertainty. The main developments remained prominently political as the quasi-same new elected parliament would not be able to impose reforms and implement a well-defined restructuring plan for the country’s debt. Consequently, Bonds’ holders are extremely cautious today about the future of their holdings as the shape of the economic recovery is unknown.

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), followed a sharp decline of 12.77% YTD and 1.85% weekly to stand at 9.56 points by the week ending June 02, 2022 compared to the week of May 26, 2022. As for the JP Morgan EMBI, it slightly retreated by 0.08% to stand at 788.14 by the end the week of June 02, 2022, compared to 788.79 at the end of the week of May 26, 2022.

Furthermore, the yield on the 5 years (5Y) Lebanese Eurobonds registered a remarkable drop of 110 basis points (bps) while the 10 years (10Y) recorded an uptick of 250 basis points (BPS) to end the week of June 02, 2022 at 92.4% and 76.20%.

In the US, the yields on 5-year and 10 year recorded an increase by 22 and 17 basis points to both settle at 2.92% by the week ending June 07, 2022. Despite that investors had a liquidity preference reflected by an occasional normal yield curve, the similarities between yields on the 5Y and 10Y T-bills indicates potential flat shape which is transitioning between normal and inverted shape. In fact, T-bills yields rise at the start of June as inflation and rate hikes remained a major concern for investors that are becoming less optimistic about short-term growth and are requiring higher yields to tie up their investments for the near future. Furthermore, the effect of Fed’s interest rate hikes on economic growth also continued to worry investors especially as Fed Governor Mr. Waller insured that he isn’t taking 50 bps hikes off the table until inflation come back closer to the central bank’s 2% target.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a contraction from 9,080 bps to 8,948 bps whereas the 10Y spread between the yield on Lebanese Eurobonds and their US comparable registered a growth from 7,095 to 7,328.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank