Fed decided to leave interest rates unchanged at their highest level in two decades

21/09/202314/09/2023 ChangeYear to Date
BLOM Bond Index (BBI)7.977.762.73%32.24%
Weighted Yield          155.33%156.50%-0.75%76.87%
Weighted Spread1497815098-0.79%70.67%
21/09/202314/09/2023 Change
JP Morgan EMBI785.66793.81-1.03%
5Y LEB129.70%130.00%-30
10Y LEB86.90%89.20%-230
5Y US4.61%4.42%19
10Y US4.49%4.29%20
5Y SPREAD                   12,509                     12,558-49
10Y SPREAD                      8,241                        8,491-250

The Lebanese Army has been conducting operations targeting Syrian refugees who enter Lebanon through illegal border crossings and within refugee camps. In August alone, approximately 6,000 Syrians were either deported or sent back across the border, bringing the total number since 2023 to around 11,000. However, the on-ground situation reveals a state of disorder in these arrest and deportation operations. This is due to the complex border situation, and the Lebanese Army’s inability to fully control illegal border crossings. Meanwhile, smugglers and trafficking networks continue to operate, creating a parallel economy worth hundreds of thousands of dollars. This illicit activity benefits “top officials” and security personnel.

While Caretaker Prime Minister Najib Mikati addresses the Syrian refugee issue on international platforms in New York, Lebanon seems unable to negotiate a bilateral agreement with the Syrian regime to implement a plan for the return of Syrian refugees. This is especially challenging since the Syrian regime has not expressed a clear willingness to accept their return without political concessions. However, many believe that Lebanon continues to handle the issue outside of its official narrative to divert attention from the parties genuinely responsible for the country’s current situation.

Nevertheless, 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 remarkably by 2.73% to stand at 7.97 points by the end of the week of September 21, 2023. As for the JP Morgan EMBI, it dropped by 1.03% to stand at 785.66 by the week of September 21, 2023 compared to 793.81 in the previous week.

US treasury yield curve shifted higher this week, as five and ten years yield increased respectively by 0.19 and 0.2 bps to stand at 4.61% and 4.49%. Moreover, three months (3M) yield reached the highest figure of 5.57% as of September 21st, 2023. As such the yield curve is still inverted.

Federal Reserve officials forecast higher interest rates through 2026 this week, a sign that borrowing costs are not heading back to the rock-bottom levels normal before the pandemic. Indeed, the era of ultralow interest rates may be over. At the very least, policymakers don’t expect the type of low borrowing costs that prevailed before the pandemic to return anytime soon. The Federal Reserve decided this week to leave interest rates unchanged at their highest level in two decades, and left the door open to raising rates again before the end of the year. But an even more significant if subtle change lurked in its freshly released economic projections.

Fed officials do not expect rates to go much higher, the next quarter-point increase is likely to be the last, if they make even that. But they do expect borrowing costs to stay elevated for years to come. Policymakers expect their benchmark short-term interest rate to stay above 5% next year, and to end 2025 at nearly 4%. That would be roughly double where they were at the end of 2019. Even in 2026, when, the Fed hopes that inflation will have been fully stamped out and economic growth will have settled back into its longer-run trend, policymakers expect rates to remain well above the levels that prevailed before the pandemic.

That conclusion stems in part from a simple observation: The Fed has raised interest rates aggressively over the past year and a half, yet the economy has barely blinked. That suggests that after years in which even the slightest increase in rates threatened to bring growth to a halt, the economy might at last be able to withstand higher borrowing costs.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds dropped respectively by 30 and 230 bps to stand at 129.7% and 86.9%, by the week ending September 21, 2023 compared to the previous week.

Applications for US unemployment benefits fell to the lowest level since January last week, indicating a healthy labor market that continues to support the economy. Initial jobless claims dropped by 20,000 to 201,000 in the week ending September 16, returning to within striking distance of the lowest level in more than five decades, according to Labor Department data. The figure was below all estimates in a Bloomberg survey of economists. Continuing claims, which are a proxy for the number of people receiving unemployment benefits, declined to 1.66 million in the week ending September 9. That was also the lowest level since the start of the year.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a downturn from 12,558 and 8,491 bps to 12,509 and 8,241 bps respectively by the week ending September 21, 2023.

5Y Credit Default Swaps (CDS)
 Source: Bloomberg



Weekly Change of Lebanese Eurobonds Prices 

MaturityCoupon in %21/09/202314/09/2023Change21/09/202314/09/2023Change bps

Source: BLOMInvest Bank

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