US Yields Dropped Amid Unexpected Chaotic Week

The Lebanese Eurobonds market is still recording an all-time worst performance and wavering around the 7 cents during the course of the week. The suffering is certainly justified by 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 0.70% to stand at 7.11 points by the week ending March 16, 2023. However, it increased by 17.91% Year to date (YTD). As for the JP Morgan EMBI, it rebounded by 0.63% to stand at 776.01 by the week of March 16, 2023 compared to 771.14 by the end the week of March 9, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds jumped by 155 and 150 basis points (bps) to stand at 130.60% and 102.05% respectively by the week ending March 16, 2023, compared to the previous week.

The US witnessed an unexpected chaotic week. The Bonds’ yields plunged from multiyear highs as investors took a flight to safety by heading to safe-haven assets such as US Treasury and Gold amid concerns about American regional banks shutdown of Silicon Valley Bank and Signature Bank as well as worries about Credit Suisse. In fact, all US T-bills yields took a wild swing with the 3M Treasury yields dropped by 31 bps to 4.74% by March 16, 2023 while the 2 Y T-bills yield fell weekly by 76 bps to 4.14% by the end of the week after having a rough slap lower to 3.72% on Thursday. Moreover, the 6M and 1 Y T-Bills are granting now a 4.94% and 4.49% compared to last week return of 5.32% and 5.18%. Similarly, the longer term yields dropped this week with 5Y and 10Y recorded a downtick of 50 bps and 37 bps, respectively, to stand at 3.72% and 3.56% by March 16, 2023.

The last two weeks’ developments have come as a shock to the market. Investors seemed not fully convinced with the latest economic data and eyes turned to the next FOMC meeting this month, especially as inflation and unemployment data were out this week with 6% YOY inflation and 3.6% unemployment rate still present a challenge for the Federal Reserve. In particular, the persistent high inflation rates and tight labor market could clear the way for further Fed rate hikes most probably about 25 bps, however in the wake of the banking concerns and rapid moves in markets, a potential credit tightening could be seen which pushes traders now to expect a contraction in the economy to come sooner and would shape next Central Bank’s decision.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 12,483 and 9,662 bps to 12,688 and 9,849 bps respectively by the week ending March 16, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank