This week, Lebanon took a step toward a more realistic value for the pound by adopting an official exchange rate of 15,000 pounds per dollar, up from 1,507.5, but still leaving the local currency well below its market value. This step was a condition set by the International Monetary Fund (IMF) for a $3 billion bailout, as part of a tentative agreement with Lebanon. Unfortunately, the progress in implementing reforms set by the IMF remain very slow.

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 10.05% over the week, to stand at 7.34 points by the week ending February 2, 2023 and it increased by 21.71% Year to date (YTD). As for the JP Morgan EMBI, it grew by 1.33% to stand at 806.57 by the end the week of February 2, 2023, compared to 796.01 by the end of the week of January 26, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds recorded respectively a downfall of 785 and 985 basis points (bps) to stand at 124.10% and 97.05% by the week ending February 2, 2023, compared to the week of January 26, 2023.

Treasury Yield Curve shifted lower on February 2^nd, 2023 compared to the previous week. Throughout the week, the curve remained flattened, pointing towards a recessionary scenario as the yields on three and six months reached the highest figures of 4.66% and 4.76% respectively. Interestingly, in the previous week of January 26, six months and one year yields consisted of the highest figures.

In their last meeting on February 1, 2023, Chair Jerome Powell and fellow policymakers lifted the Fed’s target for its benchmark rate by a quarter percentage point to a range of 4.75%. The move followed a half-point increase in December and four relatively bigger increases of 75 basis points prior to that. The unanimous decision by the Federal Open Market Committee was in line with financial market expectations. In fact, the Federal Reserve slowed its interest rate hike to fight inflation and reported that further hikes are in store as officials debate when to end their most aggressive tightening of monetary policy. The Fed also noted that inflation has eased to 6.5% but remains elevated.

On another note, the labor market remained resilient despite higher borrowing costs and mounting fears of a recession this year. In fact, US jobless claims dropped for the third consecutive time by 3000 to stand at 183,000 for the week ending January 28, the lowest level since April 2022. The surprise decline, reported by the Labor Department on Thursday, has raised cautious optimism that the US economy may skirt a recession or just experience a shallow and short downturn. Furthermore, Federal Reserve Chair Jerome Powell reported that the economy can reach its 2% target inflation without a really significant downturn or a really big increase in unemployment. However, the labor market has yet to respond meaningfully to a rapid increase in interest rates, as there are usually lags in the effect of monetary policy.

Finally, the Fed is still hopeful that it can achieve a “soft landing,” a scenario in which it can tame inflation while avoiding a surge in unemployment. While some economists expect that the aggressive tightening will ultimately tip the US into a recession, a slower inflation rate and steady hiring could help the economy avoid one.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a fall from 12,837 and 10,341 bps to 12,061 and 9,365 bps respectively by the week ending February 2, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank