The Lebanese Eurobonds market continues to face an unprecedented downturn, with performance still well below the 8 cents mark, despite latest improvements. The ongoing economic and political challenges in Lebanon have severely impacted investor confidence, leading to a sharp decline in Eurobond values. This dismal performance highlights the deep-rooted structural issues within the country’s economy, which have further eroded the attractiveness of Lebanese Eurobonds to international investors. As Lebanon grapples with a complex web of fiscal and governance problems, the Eurobonds market serves as a stark indicator of the broader economic struggles that the nation currently confronts.

In turn, 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), slightly decreased this week by 0.46% to stand at 7.57 points by the week ending August 17, 2023. As for the JP Morgan EMBI, it dropped by 2.05% to stand at 787.10 by the week of August 17, 2023 compared to 803.56 by August 10, 2023.

Furthermore, the yield on the five years (5Y) Lebanese Eurobonds rose by 105 bps to stand at 128.95% while the 10 years (10Y) Lebanese Eurobonds dropped by 55 bps to reach 90.25% by the week ending August 17, 2023 compared to the previous week.

Global Government bond yields continued to rise, with the US 30-year yield reaching its highest level since 2011 and other benchmarks returning to levels last seen in 2008 such as; in the UK, the equivalent yield surged to a 15-year peak, while the German yield approached its highest point since 2011. This increase comes as strong economic data challenges the belief that central bank rates have peaked. On Thursday, both 5 and 10 year US Treasury yields rose, approaching their highest points of 2022, standing respectively at 4.42% and 4.30% by August 17, 2023. The surge in US Treasury yields has driven a global sell-off in bonds, defying expectations that the US economy would enter a recession despite over five percentage points of interest-rate hikes by the Federal Reserve.

By this move, the U.S. Treasury yield curve has steepened, with yields moving higher this week while investors parsed meeting minutes from the Federal Reserve signaling more rate hikes that could be needed in the coming period. Such shifts in the yield curve’s shape can have implications for borrowing costs, investment decisions, and monetary policy considerations.

The rise in longer-term US government bond yields has sparked concerns about a potential government bond crisis in the US. Though, we hold a different view. The surge in yields can be attributed to a convergence of various factors and associated concerns. A combination of events has contributed to this situation. Firstly, in early August, the US Treasury revealed a debt supply that exceeded expectations, coinciding with a credit quality downgrade by ratings agency Fitch. Secondly, the Bank of Japan’s decision to ease its yield curve control policy in July likely resulted in reduced interest from Japanese investors. Lastly, Federal Reserve Chair Powell’s indication that quantitative tightening may persist until 2024 suggests a decrease in central bank purchasing of US bonds. These combined elements result in an elevated US debt supply, raising questions about the private sector’s capacity to absorb it and the potential for creditworthiness challenges in the US.

On a different note, latest inflation figures have emerged subsequent to the Central Bank’s July meeting, presenting a blend of results. The CPI for July met projections with a 0.2% monthly increase, while the producer price index (PPI) for the same period slightly exceeded expectations at 0.3%. Moreover, jobless claims for the week ending August 12, 2023 were slightly lower than anticipated reaching level of 239,000 down from 250,000 last week and from 252,000 one year ago. In short, The US economy remained supported by a tight labor market, as recent data indicates a strong rise in retail sales for July and a significant increase in single-family home construction. As a result, economists have revised their growth projections for the third quarter. However, this resilience also amplifies the possibility of another interest rate hike by the Federal Reserve.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a rise from 12,369 bps to 12,453 while the 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a drop from 8,671 bps to 8,595 by the week ending August 17, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank