Increasing Tensions in Lebanon following Hamas attack on Israel

12/10/202305/10/2023 ChangeYear to Date
BLOM Bond Index (BBI)6.757.69-12.23%11.96%
Weighted Yield          179.44%162.71%10.28%104.33%
Weighted Spread173831571310.63%98.07%
12/10/202305/10/2023 Change
BBI6.757.69-12.23%
JP Morgan EMBI769.09763.380.75%
5Y LEB143.50%132.40%1110
10Y LEB100.50%89.95%1055
5Y US4.69%4.68%1
10Y US4.70%4.72%-2
5Y SPREAD                   13,881                     12,7721109
10Y SPREAD                      9,580                        8,5231057

As the conflict escalates between Israel and Gaza due to the Hamas attack on Saturday, it is increasingly becoming a cross-border threat. While the Lebanese armed group Hezbollah has not yet officially entered the conflict, the heightened tensions with Israel are impacting communities along the border between the two countries. Indeed, since Sunday, thousands of residents of southern Lebanese villages near the Israeli border have been evacuating their homes out of fear of a potential war erupting between Israel and Hezbollah. The question remains: will Lebanon’s heavily armed Hezbollah militia join the ongoing conflict between Israel and Hamas?

The answer to this question could significantly influence the course of a battle that is poised to reshape the Middle East. Hezbollah, like Hamas, enjoys support from Iran, and it has remained undecided about participating in the clashes between Israel and the Islamic militant rulers of the Gaza Strip. Over the past six days, Israel has imposed a siege on Gaza and launched hundreds of airstrikes. Israel, committed to defeating Hamas, is now preparing for a potential ground offensive. As the country’s political and military leaders deliberate their next move, they are closely monitoring Hezbollah’s actions along Israel’s northern border and have deployed additional troops to the region.

Concerning the Eurobonds market, 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), decreased significantly by 12.23% to stand at 6.75 points by the end of the week of October 12, 2023. As for the JP Morgan EMBI, it rose by 0.75% to stand at 769.09 by the week of October 12, 2023 compared to 763.38 in the previous week.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds increased respectively by 1,110 and 1,055 bps to stand at 143.5% and 100.5%, by the week ending October 12, 2023 compared to the previous week.

The consumer-price index rose by 3.7% from a year earlier, while core prices increased by 4.1%. Fed officials are likely to hold short-term interest rates steady at their next meeting due to rising long-term interest rates, which could potentially slow the economy. However, the decision hinges on strong evidence of cooling price pressures and economic activity. The Israel-Hamas conflict also adds a non-negligible risk of another Fed rate hike. Indeed, progress in reducing inflation stalled in September, indicating a bumpy path toward extinguishing price pressures entirely. While price gains have significantly slowed from the 40-year highs of the previous year, particularly when considering core inflation (excluding food and energy prices), there’s concern that core prices rose at a slightly faster rate last month. The latest data suggests that without a further economic slowdown, inflation might settle around 3%, below the alarming rates that led to Federal Reserve interest-rate increases but still above the central bank’s 2% target. It is also worth mentioning that housing costs are expected to provide relief in overall inflation in the coming months as the effects of the Fed’s interest-rate hike act with a lag.

Jobless claims remained stable at 209k for the week ending October 7, despite the strike by United Auto Workers. Indeed, claims are rising in states where the strike is generating layoffs. In more details, claims went up the most in California (4.2k), Texas (2.8k), Michigan (1.9k), Illinois (1.9k), and New York (1.6k). Economists now anticipate that layoffs will intensify, potentially leading to an increase in the unemployment rate to 3.9% in October. Nonetheless, strikes by union members and recent wage gains in other union contracts could drive worker pay higher throughout the economy.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an upturn from 12,772 and 8,523 bps to 13,881 and 9,580 bps respectively by the week ending October 12, 2023.

 

5Y Credit Default Swaps (CDS)

12/10/202305/10/2023
Lebanon
KSA6255
Dubai8069
Brazil182196
Turkey398409
 Source: Bloomberg

Weekly Change of Lebanese Eurobonds Prices 

 PricesWeeklyYieldsWeekly
Maturity Coupon in %12/10/202305/10/2023Change 12/10/202305/10/2023Change bps
04/11/20246.256.957.91-12.22%545.82%484.47%6134
03/12/20247.006.887.91-13.02%486.25%433.87%5238
26/02/20256.207.117.91-10.13%365.04%336.48%2855
12/06/20256.257.258.04-9.83%278.99%258.87%2012
28/11/20266.606.827.91-13.81%153.65%139.95%1370
23/03/20276.856.987.92-11.86%143.49%132.45%1104
29/11/20276.756.827.92-13.89%126.57%114.62%1195
03/11/20286.656.957.91-12.15%111.50%101.47%1003
26/02/20306.656.917.92-12.75%101.69%91.47%1022
22/04/20317.007.007.91-11.42%102.10%91.48%1062
23/03/20327.006.997.91-11.65%100.57%89.96%1061
02/11/20357.056.977.93-12.12%100.18%88.12%1207
23/03/20377.256.897.84-12.11%104.17%92.01%1217

Source: BLOMInvest Bank

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