US Yields Dropped Awaiting Upcoming Fed’s Meeting

Constant disappointment on the political front prevailed. Failure to elect a new head of State for more than 8 attempts coupled with a peaking balance of payments and fiscal deficit is taken its toll on the Lebanese economic situation. The deterioration of the governmental institution and absence of any reform action is signaling another year of discontent for the Lebanese. As such, the BBI index remains at lowest levels despite slight weekly uptick as the latest disruptions in Lebanon are fueling worries among bonds ‘holders. Noting, investors’ concerns regrew mainly as the country seems to be paralyzed by multiple regional and domestic developments and far away from any reform plan.

In this context, 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 0.53% weekly along with a substantial fall YTD of 43.80% to stand at 6.16 points by the week ending December 8, 2022. As for the JP Morgan EMBI, it rose by 0.43% to stand at 777.94 by the end the week of December 8, 2022, compared to 774.59 by the end of the week of December 1, 2022.

Furthermore, the yield on the 5 years (5Y) and 10 years (10Y) Lebanese Eurobonds registered respectively a drop of 79 and 12 basis points (bps) to stand at 136.21% and 115.08%, by the week ending December 8, 2022 compared to the week of December 1, 2022.

In the U.S market, the Treasury yields rebounded by Friday after pulling back in mid-week’s session as investors pondered the outlook for the U.S economy.  Despite that recent data has highlighted a mixed image for the US economy pushing some T-bills holders into confusion regarding interest rates hikes; the Fed is widely expected to add another 50 bps at its December meeting though steep interest rate hikes would lead the US economy to an inevitable recession.

As such, shorter yields have jumped amid confusing expectations about Fed’s policy while longer yields dropped by Friday. In fact, 1Y yields added 5 bps to stand at 4.71%, while 2Y and 3Y both added 6 bps to stand at 4.31% and 4.04% on December 08, 2022. Meanwhile, 5Y yields added 3 bps to 3.71% whereas 10Y yields retreated by 5 bps to stand at 3.48% by the end of this week, thereby still signaling a recession on the horizon.

On the economic front, the number of Americans filing new claims for unemployment benefits edged higher by 4,000 to stand at 230,000 in the week ending December 3, 2022, matching market expectations. Noting that 4 week moving average was 230,000, the highest level since the last week of August. Moreover, continuing claims reached the highest since the week ending February 5, 2022, and rose for an eighth straight week to 1.671 million in the last week of November.

Overall, a series of upcoming economic indicators releases could offer further clarity to investors ahead of the Fed’s meeting, November’s producer price index will come out on Friday followed by preliminary consumer sentiment data for December. However, the Fed would be looking carefully to many indications such as mismatch between job openings and job seekers, coming layoffs, and not enough people are reentering the workforce which makes it more difficult for the Fed to stamp out wage inflation and move peacefully with its monetary policy plan.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a downtick from 13,332 and 11,167 bps to 13,250 and 11,160 bps respectively by the week ending December 8, 2022.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank