Surprise: Inflation down in the US

10/11/202203/11/2022 ChangeYear to Date
BLOM Bond Index (BBI)
Weighted Yield          158.92%158.83%0.06%80.96%
Weighted Spread15456154470.06%76.12%

10/11/202203/11/2022 Change
JP Morgan EMBI736.85714.383.15%
5Y LEB135.00%135.50%-50
10Y LEB114.50%115.20%-70
5Y US3.95%4.36%-41
10Y US3.82%4.14%-32
5Y SPREAD                   13,105                     13,114-9
10Y SPREAD                   11,068                     11,106-38

The Eurobonds performance showed slight signs of improvement this week. On November 10, the Lebanese parliament tried to elect a new head of State following the end of term of President Michel Aoun. Unfortunately, they failed to elect a new president for the fifth electoral session, thus crashing the hopes of Lebanese, that the end of Mr Aoun’s presidency would urge the assembly to elect a new president and end a power vacuum that threatens to paralyze state operations.

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 increase of 0.48% weekly and remarkable drop YTD of 43.25% to stand at 6.22 points by the week ending November 10, 2022 compared to the week of November 3rd, 2022. As for the JP Morgan EMBI, it increased by 3.15% to stand at 736.85 by the end the week of November 10, 2022, compared to 714.38 at the end of the week of November 3rd, 2022.

Furthermore, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds registered respectively a decrease by 50 and 70 basis points (bps) to stand at 135% and 114.5%, by the week ending November 10, 2022 compared to the week of November 3rd, 2022.

In the U.S market this week, six months and one-year yields reached the highest values of 4.52 and 4.59 respectively. In fact, one-year yield exceeds 10-year yield by 77 basis points. The US treasury yield curve reached new extremes of inversion on Thursday, November 10th as the likelihood of an upcoming recession is very possible.

This week, US inflation surprised traders with slower growth in consumer prices, to reach 7.7%, lower percentage than forecasted of 8.1%. Consequently, policy makers are speculating that the Federal Reserve will ease the pace of its interest-rate hike. Therefore, the market expectation is now showing that a 50-basis-point hike in December is far more likely than a 75-basis-point move, lowering the rates differential with the European Central Bank and the Bank of England.  The Fed is likely to remind the market that underlying inflation remains persistent and is still three-times higher than target of 2%.

US Jobless claims increased by 8000 over the week to reach 225k, reflecting a more negative outlook as companies anticipate a downturn. Furthermore, as monetary policies operate with a lag, we estimate a modest rise in layoffs over the near term, consistent with gradual cooling of a still-tight labor market.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a decrease from 13,114 bps and 11,106 bps to 13,105 and 11,068 bps respectively by the week ending November 10th, 2022.

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

Weekly Change of Lebanese Eurobonds Prices 

Maturity Coupon in %10/11/202203/11/2022Change 10/11/202203/11/2022Change bps

Source: BLOMInvest Bank

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