Hot Inflation Pushing Fed Towards Further Interest hike

The Bond market in Lebanon revealed signs of improvement this week but remained relatively below its resilient 7 cents levels. In turn, the yields on the 5Y and 10Y Lebanese Eurobonds dropped sharply as the bond performance increased gradually during the course of this week following a most positive scenario resulting from the historic agreement demarcating the dispute maritime border between Lebanon and Israel. Of course short term cautious positivity would be on the horizon, however, the financial and economic crises in the country remain a major challenge for the Government thus the need for implementing a well reform and recovery plan to put Lebanon on the safe path. On top of that, finding gas on our shores, a proper channeling and proper governance remain a big question. Lebanon must go fast on implementing the preconditions requested by the IMF especially as the next presidential election, persisting political deadlock and State dysfunction impose an unknown timeline for the recovery.

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), recorded a slight increase of 4.28% weekly to stand at 6.33 points by the week ending October 13, 2022 compared to the week of October 06, 2022. As for the JP Morgan EMBI, it decreased by 2.41% to stand at 705.33 by the end the week of October 13, 2022, compared to 722.72 at the end of the week of October 06, 2022.

Furthermore, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds registered respectively a decrease of 470 and 796 basis points (bps) to stand at 132.50% and 112.10% by the week ending October 13, 2022 compared to the week of October 06, 2022.

In the U.S market this week, the yields on the 5Y and 10Y T-bills, both increased by 16 bps and 14 bps, respectively, to stand at 4.21% and 3.97% in the week ending October 13, 2022. In addition, the yields on one and two years reached respectively the highest percentages of 4.47% and 4.46%, thus still indicating an inverted yield curve and showing further signs of an upcoming recession.

US benchmark bond yields recorded all-time high levels since October 2007 after the release of the US inflation data yesterday that came hotter than expected. Overall consumer price index (CPI) rose by 0.39% on a monthly basis and 8.2% yearly. Meanwhile, core CPI excluding energy and food increased by 0.58% monthly and 6.6% yearly. In turn, September inflation reaffirmed the expectations of a 0.75% Fed rate hike in November. Inflation remains high; crucially however, jobs still strong while layoffs are low as jobless claims for the week ending October 08 totaled 228,000, an increase of 9,000 from the week before.

In short, growth is likely to slow further as higher costs of capital engender a slowing of business as well as a further slowing in economy. In turn, persistently high inflation and the accompanying aggressive fed policies present upside risks to the dollar and short-term bond yields.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a decrease from 13,315 bps and 11,623 bps to 12,829 bps and 10,813 bps respectively by the week ending October 13, 2022.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank