The Lebanese Eurobonds market is still recording an all-time worst performance below the 7 cents during the course of the week. In fact, as we near the end of term of BDL governor Riad Salameh, efforts to come to a consensus on his successor have hit a roadblock. The issue at hand is not limited to the list of potential candidates being circulated, but also pertains to the authority of the caretaker government to make appointments at this level. This has resulted in a dispute between Prime Minister Najib Mikati and several political factions in the government, with Hezbollah being one of the leading forces. Additionally, the selection of a new governor is connected to a significant project involving extensive amendments, which many are calling for amending and putting the governor under the supervision of a specific authority, and not leaving him with absolute powers. Moreover, the new governor is expected to have a central role in restructuring Banque du Liban and the banking sector, and setting up technical management for the banking and monetary work in Lebanon in connection with an agreement with the International Monetary Fund (IMF).

Consequently, 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), dropped further this week by 3.45% to stand at 6.21 points by the week ending April 27, 2023. As for the JP Morgan EMBI, it rose by 0.49% to stand at 785.54 by the week of April 27, 2023 compared to 781.71 by the end the week of April 19, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds rose respectively by 390 and 345 basis points to stand at 144.4% and 115.05% by the week ending April 27, 2023, compared to the previous week.

The U.S. Treasury Yield Curve shifted lower this week as one and five years yields fell respectively by 6 and 11 bps to stand at 4.78% and 3.6%. Nevertheless, three months yield slightly rose by 2 basis points reaching the highest figure of 5.18% by April 27, 2023. As such, the spread between the 3-month Treasury yield and the 1-month yield was already the highest it’s ever been and continued that trend on April 27, 2023, thus still indicating an inverted yield curve and still showing further signs of an upcoming recession.

Credit default swaps on the U.S. are the most expensive they’ve been, with the 5-year CDS at 71 bps, up from 25 bps at the beginning of the year 2023, mainly driven by growing fears of US default on its debt. However, there is minimal probability of the US defaulting on its debt; additionally due to grace periods, the chances of a payout resulting from a default are even lower.

On another note, the FOMC is expected to increase interest rates by a final 25 basis points at the May 2-3 meeting but will probably declare an end to interest hike. Furthermore, the Committee is expected to give a statement saying that they will continue to closely monitor economic and financial conditions, and will adjust the stance of policy as necessary to best promote maximum employment and 2% inflation. Noting that March’s 5% year-over-year inflation rate remained well above the Fed’s 2% target. However, the Fed is hoping to achieve a so-called soft landing, thus lowering growth just enough to bring inflation under control without causing a recession. Economists are skeptical, with many expecting the U.S. to enter a recession later this year.

US GDP report showed the economy grew at an annual rate of 1.1% in the first quarter of 2023, slow, but still positive. As such, the most predicted recession has been delayed again while economists continue to see a downturn on the horizon.  Moreover, the number of Americans filing for jobless claims for the week ending April 22 fell by 16,000 to 230,000, as per the Labor Department. Overall, 1.86 million people were collecting unemployment benefits the week that ended April 15, 3,000 fewer than the previous week. The weekly claims numbers are a proxy for layoffs, and continue to show that American workers are enjoying unusual job security despite rising interest rates, economic uncertainty and fears of a looming recession. In fact, the unemployment rate came in at 3.5% last month, a tick above January’s half-century low 3.4%. Employers added 236,000 jobs in March, down from 472,000 in January and 326,000 in February, but still strong by historic standards.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 13,679 and 10,800 bps to 14,080 and 11,152 bps by the week ending April 27, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank