The situation in Lebanon remains complex in the wake of the conflicts between Hamas and Israel.  A Hezbollah lawmaker said that the Lebanese militant group would respond “double” to any Israeli attacks on civilians after a strike that killed three children and their grandmother in south Lebanon. Indeed, the volatile situation on the Israeli-Lebanese border, where deadly clashes between Israeli troops and Iran-backed Hezbollah fighters are fuelling fears of a wider regional war.

As such, 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), deteriorated rapidly since the start of the conflict in Palestine and dropped further this week by 0.75% to stand at 5.95 points by November 9^th, 2023. As for the JP Morgan EMBI, it added 0.47% to stand at 782.41 by the week of November 9^th, 2023 compared to 778.76 in the previous week.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds increased respectively by 30 and 120 bps to stand at 157% and 112.7%, by the week ending November 9^th, 2023 compared to the previous week.

Recent changes in the U.S. yield curve hint that a potential 2024 recession might be less severe than initially thought. The shift, known as a “bear steepener,” suggests a move towards a more typical yield curve with long-term interest rates surpassing short-term rates. Historical data indicates that such shifts have led to milder recessions or even the prevention of one. Economists often analyze the U.S. Treasury bond market, specifically the yield curve, for recession clues. Unlike typical curve changes linked to falling short-term rates, this shift, as “bear steepening,” is driven by rising long-term yields. Investors interpret this as policymakers not rushing to cut rates amid a robust economy. However, this shift, though initially seeming positive, could adversely affect mortgages, credit cards, and business loans, potentially tightening financial conditions and risking economic slowdown.

US central bankers are trying to assess whether they need to take their benchmark policy rate slightly higher, and debating how long they should hold rates at elevated levels. The policy-setting Federal Open Market Committee last week held rates at 5.5% range, the highest level in 22 years. Inflation has decelerated, but remains above the Fed’s target, at 3.7% by end of September. Fed officials are set to meet again on December 12 and 13. In his speech, the Fed chief said it wasn’t clear how much more inflation progress can be made in the future through supply-side improvements.

Federal Reserve Chair Jerome Powell said the US central bank will continue to move carefully but won’t hesitate to tighten policy further if needed to contain inflation. The tenor of Powell’s comments reinforced that policymakers are not ready to declare an end to their tightening campaign, even though financial markets and many economists have concluded the central bank is done raising rates. Powell said the supply-side benefits that have helped slow inflation so far may have run their course, and repeated that stronger growth could warrant further tightening.

Furthermore, US jobless claims ticked lower to 217,000 in the week ending November 4, while continuing jobless claims, a proxy for the number of people receiving unemployment benefits, increased to 1.83 million in the week ending October 28, the highest since mid-April, according to Labor Department data. The recent pickup in continuing claims suggests unemployed workers are increasingly having a harder time finding new jobs. Demand for workers is retreating from unprecedented pandemic levels and the unemployment rate now stands at the highest level in nearly two years at 3.9% by end of October 2023. Economists expect the labor market to gradually cool going forward, and that is already translating into higher anxiety among workers. With interest rates now at a the highest levels in more than two decades, some employers are starting to scale back their hiring plans, while others are cutting positions altogether.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an upturn from 15,205 and 10,683 bps to 15,235 and 10,808 bps respectively by the week ending November 9^th, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank