US Sanctions Against Former Central Bank Governor Riad Salameh!

The U.S. Treasury, in cooperation with the UK and Canada, has imposed sanctions on the former governor of Lebanon’s central bank, Riad Salameh, and four associates due to their involvement in an international corruption scheme. They are accused of enriching themselves through shell companies, real estate investments, and violating Lebanese law. The sanctions involve blocking their assets in the U.S., but do not apply to the Lebanese central bank. The goal of the sanctions is to promote positive change in behavior rather than just punishment.

Consequently, the Lebanese Eurobonds market is still recording an all-time worst performance below the 8 cents during the course of the week. 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 this week by 0.48% to stand at 7.61 points by the week ending August 10, 2023. As for the JP Morgan EMBI, it rose by 0.92% to stand at 803.56 by the week of August 10, 2023 compared to 796.24 by August 3^rd, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds rose respectively by 35 and 30 bps to stand at 127.9% and 90.8% by the week ending August 10, 2023 compared to the previous week.

US Treasury curve steepening as the gap between short term and long term interest rates has increased, thus suggesting that investors are demanding higher yields on longer term bonds relative to shorter term bonds. This can occur for various reasons, such as changing economic conditions, inflation expectations or shifts in investor sentiment.

Federal Reserve policymakers are increasingly likely to leave interest rates unchanged at their next meeting in September after new data showed further signs of cooling inflation. In fact, the core consumer price index, which excludes often-volatile food and energy costs, rose by 0.2% for the second month, as per the Bureau of Labor Statistics. That marked the smallest back-to-back gains in more than two years. The overall CPI also increased by 0.2% in July where inflation stood at 3.2% from a year earlier.

The Fed in July increased the federal funds rate to 5.5%, the highest level in 22 years. The median estimate of Fed officials’ most recent quarterly projections, published in June, showed two more rate increases this year, the first of which was accomplished with last month’s hike.

Fed officials have given differing opinions on the need for more hikes, with Governor Michelle Bowman reiterating on Monday her view that the US central bank may need to raise rates further in order to fully restore price stability, while Philadelphia President Patrick Harker said Tuesday the US central bank may be able to hold steady from here on out.

US jobless claims for the week ending August 5th increased by 21,000 to stand at 248,000. The reading was above the consensus (230k) and Bloomberg Economics’ projection (240k). The largest increases in non-seasonally adjusted claims were in Ohio (5k), California (3k) and Texas (2k). Nonetheless, continuing claims declined by 8k to 1,684k for the week ending July 29. The insured unemployment rate, the number of people currently receiving unemployment insurance as a share of the labor force, was unchanged at 1.1%. Economists continue to expect a recession toward the end of this year, with the unemployment rate rising to 4.2% by then.

Indeed, the latest uptick in jobless claims partially reflects the bankruptcy of Yellow Corp., which affected about 30k workers. The bankruptcy is not an isolated case, reflecting a freight recession that has been going on for a year. Corporate bankruptcies also have been increasing for sectors such as consumer discretionary and financials, reflecting the mixed economic landscape.

On another note, by the beginning of the month of August, Fitch stripped US of triple A rating to double A plus, due to worsening fiscal conditions and governance. The rating agency reported that the downgrade reflected expected fiscal deterioration over the next three years and a high and growing general government debt burden. Fitch also observed a decline in effective governance during the past two decades, which has been evident in recurrent conflicts over the debt limit and last minute resolutions.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded respectively a rise from 12,325 and 8,630 bps to 12,369 and 8,671 bps  by the week ending August 10, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank