Bonds Market Mixed Driven By Uncertain Outlook

Given the circumstances in the Lebanese market, especially the lack of corrective measures including agreement with the IMF and talks with creditors, the Lebanese Eurobonds market continued to suffer under full absence of confidence and was traded during this week below the 8 cents for the first time. Notable decline for the Bonds index was registered due to a negative sentiment concerning investors’ anticipation for the recovery path. Moreover, difficult time is ahead Lebanon as PM Mikati was chosen yesterday to form a new Government that has the main task to sign an agreement with the IMF so that a total collapse could be avoided and chances to save Lebanon would be placed on the table.

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), recorded further drops of 28.28% YTD and 6.09% weekly to stand at only 7.86 points by the week ending June 23, 2022 compared to the week of June 16, 2022. As for the JP Morgan EMBI, it slightly expanded by 0.64% to stand at 755.68 by the end the week of June 23, 2022, compared to 750.91 at the end of the week of June 16, 2022.

Furthermore, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds registered a notable increase of 300 and 500 basis points (bps), respectively to end the week of June 23, 2022 at 107.40% and 90.25%.

This week in the US, investors were increasingly concerned over possible recession. Historically speaking, disinflation action often leads to significant economic slowdown as Central Banks are maintaining aggressive monetary tightening. In turn, the yields on 5-year and 10 year recorded a drop by 21 and 19 basis points to settle at 3.14% and 3.09%, respectively by the week ending June 23, 2022.

Bonds’ yields were seen this week trading marginally lower as the Fed signaled further interest rate hikes to control high inflation, but it seems the strong sentiment regarding recession are going momentum. Moreover, the US labor department showed weekly jobless claims fell to a seasonally adjusted 229,000 by June 18, though it remains very low. So, on the other hand, favorable Labor market and consumer spending would keep America out of recession, despite that fears in the coming period remain elevated due to the continuous war in Ukraine, uncontrollable inflation hikes and possible new wave of COVID-19. The outlook remains highly uncertain.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 10,105 bps and 8,197 bps to 10,426 bps and 8,716 bps by the week ending June 23, 2022.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank