2Y Yield At Record High In Decade After Powell Comment

The Lebanese Eurobonds market seems wavering around the 7 cents with little changes recorded during the course of the week. The suffering is certainly predictable due to the negative sentiment concerning investors’ anticipation for any recovery plan. Lebanon is officially in the middle of financial, political, and legal chaos which is preventing any solution for the continuous turmoil.

Given the continuous 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), decreased further this week by 0.40% to stand at 7.16 points by the week ending March 10, 2023. However, it increased by 18.74% Year to date (YTD). As for the JP Morgan EMBI, it rebounded by 0.45% to stand at 771.14 by the week of March 9, 2023 compared to 767.69 by the end the week of March 2^nd, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds jumped by 85 and 61 basis points (bps) to stand at 129.05% and 100.55% respectively by the week ending March 9, 2023, compared to the previous week.

This week in the US, the Treasury Yield curve shifted higher as short-term treasury are now offering a risk-free return above 5% while long-term yields dropped after the latest comments from Federal Reserve Chair Jerome Powell regarding further tightening monetary policy illustrated by a faster pace increase for rate hikes is necessary. In particular, the most sensitive bonds to Fed’s policy “3M Treasury yields” jumped to 5.05% while the 6M and 1Y is granting now a 5.32% and 5.18% return, touching levels last seen in 2007. Contrary to longer term yields, the 5Y and 10Y yields dropped this week by 10 bps and 15 bps, respectively, to stand at 4.22% and 3.93% by March 09, 2023.

On a different note, initial jobless claims increased on a weekly basis by 21,000 to reach 211,000 last week, the biggest weekly increase since early October. However, the underlying trend remains consistent with a tight labor market which is often associated with elevated inflation. According to the National Bureau of Economic Research, the unemployment rate is still at historic lows of 3.5% while, currently, 7% of available jobs are unfilled, a historically high level. The U.S. economy is still showing momentum which definitely would prompt the Fed to accelerate interest rate increases.

As a matter of fact, for investors aiming to put some cash to work, short-term Treasuries might be an attractive risk-free return today as their payments are backed by the full support of the United States. However, traders should be alert that the real yield could be eaten away once inflation rises at a pace greater than the yield. Undoubtedly, US bonds may be a great opportunity to get some revenue on cash, but they shouldn’t make up the entire share of investors’ portfolios.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 12,388 and 9,586 bps to 12,483 and 9,662 bps respectively by the week ending March 10, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank