The United States is actively considering the resolution of the longstanding border dispute between Lebanon and Israel, as stated by senior White House adviser Amos Hochstein during his recent two-day visit to Lebanon. Hochstein expressed that it was a natural step to explore this matter, particularly in light of the delineation of the maritime border between the two nations in 2022. This maritime agreement has allowed Lebanon to commence offshore exploration activities. During his trip, Hochstein visited southern Lebanon to gain a deeper understanding of the situation and gather insights on the necessary steps for a potential resolution. He emphasized the importance of hearing from both sides and assessing whether this is the right time to address the issue.

The current boundary separating the two countries is referred to as the Blue Line, established by the United Nations to mark the withdrawal of Israeli forces from southern Lebanon in 2000. Recent tensions along this border, including rocket attacks and confrontations involving Hezbollah and Israeli forces, have underscored the urgency of determining the land border. Lebanon’s caretaker Foreign Minister, Abdallah Bou Habib, has expressed the hope that defining the land border could help alleviate this tension. The United Nations Interim Force in Lebanon (Unifil) has been facilitating discussions between the concerned parties to address points of contention hindering the delineation of the land border.

In this context, 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 this week by 1.17% to stand at 7.6 points by the week ending August 31, 2023. As for the JP Morgan EMBI, it added 0.72% to stand at 799.07 by the week of August 31, 2023 compared to 793.32 by August 24, 2023.

Furthermore, the yield on the five years (5Y) and the 10 years (10Y) Lebanese Eurobonds added 245 and 160 bps to stand respectively at 130.5% and 91.3% by the week ending August 31, 2023 compared to the previous week.

With US inflation running hot at 3.2%, U.S. Federal Reserve Chair Jay Powell has promised to keep tightening the monetary policy until the job is done. Powell and many in the markets believe that will be when inflation returns to 2%. But the Fed’s own policies promise an even lower goal of 1%.

S&P Global has recently downgraded the ratings of multiple U.S. banks, signaling an escalating credit risk in various sectors, including U.S. Commercial Real Estate. It’s noteworthy that global banks have significantly expanded their involvement in the $6 trillion U.S. commercial real estate debt market during the first half of 2023. This expansion has triggered concerns about a potential upsurge in non-performing loans originating from this particular sector. Indeed, based on data from S&P Global Market Intelligence, U.S. subsidiaries of European banks have collectively increased their exposure to U.S. commercial real estate by 3% in the six months ending on June 30. This brings their total exposure to nearly $36 billion. This heightened lending activity is occurring amidst apprehensions among investors about the repercussions of rapidly rising interest rates on the real estate sector, as well as the impacts of remote work on office property income and the influence of e-commerce on retail property income.

On another note, initial jobless claims fell by 4,000 to reach 228,000 in the week ending August 26 according to the Labor Department. It’s the lowest level of claims since the week ending July 29. Interestingly, economists had estimated that new claims would rise by 5,000 to reach 230,000. The still low level of initial claims has been providing evidence that, despite well-publicized layoffs in tech and other sectors, and reports of reduced numbers of online job postings, most companies have either been hiring or holding onto employees and seeking other ways to cut costs. However, with credit conditions tightening and the full effects of significantly tighter monetary policy yet to be felt, overall labor market conditions are likely to cool.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a rise from 12,366 bps and 8,547 bps to 12,627 bps and 8,721 bps respectively by the week ending August 31, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank