Yields Hit 3-Month High as Fed Rates Seen Higher For Longer

Given the continuous disruptions on the political front and the total absence of any form of economic and financial reforms in Lebanon, an IMF delegation is set to visit Lebanon next March to discuss with Lebanese officials the reasons that blocked the required reforms throughout the past months. Crucially, and most importantly, the delegation is looking to see if the country will implement the necessary reforms or decide to withdraw its involvement in the Lebanese file once it concludes there is no chance for improvement.

As such, 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), continues to suffer and decreased further this week by 1.63% over the week, to stand at 7.26 points by the week ending February 24, 2023 but it increased by 20.40% Year to date (YTD). As for the JP Morgan EMBI, it declined slightly by 0.24% to stand at 776.38 by the week of February 23, 2023 compared to 778.25 by the end the week of February 16, 2023.

Furthermore, the yield on the five years (5Y) Lebanese Eurobonds jumped by 280 basis points (bps) to stand at 126.75%, while the yield on the ten years (10Y) Lebanese Eurobonds recorded an increase of 160 basis points (bps) to stand at 99.20% by the week ending February 23, 2023, compared to the previous week.

This week in the U.S, the Treasury Yield inched higher for the third consecutive weeks after data showed preliminary GDP coming higher than estimated while weekly jobless claims came lower than expected highlighting the tight labor market and the inflationary pressures. In details, the US preliminary gross domestic product report showed that American economy expanded at a 2.7% annual rate from October through December, revised down from 2.9% reported last month. Meanwhile, in seasonally adjusted terms the number of initial unemployment claims slipped by 3,000 to 192,000 over the week ending February 18, the six straight weeks below 200,000.

In fact, the labor market remains tight despite dispersed layoffs, especially in the tech sector but it is still below pre-pandemic levels which could keep Fed’s tightening policy longer. Saying that, Fed officials stated that the labor market is likely supporting the need for continued rate hikes beyond the March FOMC meeting, and the shift to smaller hikes would let them calibrate more closely with the incoming data.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 11,989 and 9,374 bps to 12,266 and 9,532 bps by the week ending February 23, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank