European investigators are arriving in Lebanon on January 16 as part of a cross-border probe into alleged fraud by the central bank governor Riad Salameh. In more details, French, German and Luxembourg judicial officials will pursue their thorough investigation in alleged corruption charges into Salameh, which was first initiated by Swiss authorities in 2021. Nevertheless, Salameh has denied any wrongdoing and reports that the probes are part of a coordinated campaign to make him a scapegoat for Lebanon’s 2019 financial collapse.

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), increased remarkably by 1.96% over the week, to stand at 6.17 points by the week ending January 12, 2023. As for the JP Morgan EMBI, it grew by 2.01% to stand at 785.34 by the end the week of January 12, 2023, compared to 769.84 by the end of the week of January 5, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds recorded respectively a downfall of 135 and 220 basis points (bps) to stand at 137.6% and 114.7% by the week ending January 12, 2023, compared to the week of January 5, 2023.

In the U.S market, the yield curve shifted lower as the yields on six months and one year fell respectively by 5 bps and 12 bps to stand at 4.76% and 4.66%. In addition, the yields on five years and ten years fell respectively by 37 and 28 bps to stand at 3.53% and 3.43% by January 12, 2023 compared to the previous week of January 5, 2023. Moreover, the yield curve is still inverted as the yields on six months and one year reached the highest figures of 4.76% and 4.66% respectively.

US initial jobless claims fell slightly to 205,000 in the week ending January 7
from an upwardly revised 206,000 level in the previous week. A decrease in claims suggests a stronger labor market, a positive sign for the US economy and stocks, but a negative sign for bonds as it suggests wage growth that could lead to inflation.

US inflation is undeniably declining standing at 6.5% by the end of December 2022 (previously 7.1%). Moreover, core inflation excluding fuel and food, which is more important for a central bank as it eliminates elements over which it has less control over was up by 5.7% over the same period. Consequently, the Federal Reserve is on track to downshift to smaller interest-rate increases following a further cooling in US inflation, though it’s likely to keep hiking until price pressures show more definitive signs of slowing.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a fall from 13,505 and 11,319 bps to 13,407 and 11,127 bps respectively by the week ending January 12, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank