Treasuries Dropped as U.S GDP Bounced Back Strong

The Eurobonds performance recorded further downtrend for the second consecutive weeks amid persistent political standoffs in addition to the absence of the recovery plan. For the fourth attempt, the Lebanese Parliament failed to elect a new president for the country while this came about a week before the end of the tenure of President Michel Aoun. This confirms the arising risk of political vacuum amid disagreements between political parties at a time Lebanon is in need to go fast in implementing reforms and plans to be pulled out of the ongoing crisis.

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 a slight decrease of 0.79% weekly and remarkable drop YTD of 42.97% to stand at 6.25 points by the week ending October 27, 2022, compared to the week of October 20, 2022. As for the JP Morgan EMBI, it increased by 2.46% to stand at 716.92 by the end the week of October 27, 2022, compared to 699.74 at the end of the week of October 20, 2022.

Furthermore, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds registered respectively an increase of 130 and 58 basis points (bps) to stand at 135.60% and 113.98% by the week ending October 27, 2022 compared to the week of October 20, 2022.

In the U.S market this week, Treasury yields touched their lowest levels of the week with 10Y T-bills dropped back below 4% to stand at 3.96%, and the 5Y T-bills fell but remained above 4% to reach 4.09% by the week ending October 27, 2022. Meanwhile, the yields on the 1Y and 2Y soared, unlike the rest of the T-bills’ yields, to reach respectively a high of 3.76% and 4.13% by the same period.

US benchmark bond prices re-picked this week as investors might want to consider fixed income to generate revenues and potentially to act as shock absorbers. This week, U.S GDP data were out with a sharp rebound after two consecutive declines in GDP showed a potential recession in the economy. In more details, the GDP growth rate in Q3 was 2.6% and caused largely by a rise in net export while a negative GDP contributions came from a number of categories including goods consumption, fixed investment, and inventories. In fact, positive GDP contributions came largely from services as well as Government spending, and net exports especially as the United States is considered as a significant exporter due to the war in Ukraine. However, a weaker consumer spending presents downside risks to future consumption as strong dollars continues to weigh on the U.S growth that could keep exports low and imports high.

Overall, the GDP data is surely seen as a green light for more Federal Reserve rate hikes and a 75 bps rate hike is expected to be declared in the next FOMC meeting despite that the labor market in the U.S is also likely to soften in the coming period.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 12,985 bps and 10,916 bps to 13,151 bps and 11,002 bps respectively by the week ending October 27, 2022.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank