The BLOM Bond Index (BBI), which tracks Lebanese government Eurobonds (excluding coupon payments), fell by 1.93% this week to 12.67 points. This drop comes amid continued Israeli breaches of its ceasefire with Hezbollah. In addition, while meetings to elect a new Lebanese president on January 9, 2025 are still ongoing, no candidate has a clear majority yet. Despite this, some bond indices remain near their highest levels in more than two years as the ceasefire remains in place. A permanent end to the Israeli conflict, along with the election of a new president, could lead to needed reforms and possibly an agreement with the International Monetary Fund (IMF) to help lift Lebanon out of default.
That said, earlier this month, Goldman Sachs (GS) published a report titled Revisiting Lebanon Debt Recovery Values, in which it revisits its previous January 2019 estimates of Lebanese debt recovery values. In its base case scenario, GS expects Lebanese Eurobonds to be worth 24.6 cents, around double their current prices. The report presented various scenarios with bond prices ranging from 12.3 cents to 36.4 cents. We explored this report in detail in a previous article titled “GS: Revisiting Lebanon Debt Recovery Values.”
However, some analysts disagree with GS’s analysis. Countries like Ethiopia and Sri Lanka, which defaulted on their Eurobonds after Lebanon, managed to restructure their debt, and their Eurobond prices recovered to more than 60%. Additionally, Eurobond holders have until March 2025 to file a lawsuit against the Lebanese Republic in New York City to retain access to their interest payments. This is a tight deadline given that no major economic, financial and political reforms have been taken.
When bond prices go down, yields go up. Consequently, the yield on 5-year bonds rose by 160 basis points to 107.2%, and the yield on 10-year bonds increased by 110 basis points to 78.7% this week.
Similarly, in the U.S., the yield curve shifted upwards as treasury yields rose this week by 6, 25, and 25 basis points for 1-year, 5-year, and 10-year bonds, respectively, reaching 4.28%, 4.43%, and 4.57% on December 19, 2024. This increase follows the Federal Reserve’s (Fed) new projections of only 2 quarter-point rate cuts in 2025, down from 4 in September’s outlook and higher inflation forecasts. The Fed’s 0.25% rate cut to 4.5% on Wednesday was already priced in by markets. Investors are currently awaiting the PCE price index’s data, the Fed’s preferred inflation measure. Fed Chair Jerome Powell said that the PCE data will probably surpass the Fed’s 2% target.
Amid these developments, traders are now pricing in only 10.7% chance of a quarter-point rate cut at the Federal Reserve’s 29 January meeting, while the likelihood of no change is 89.3%, according to the CME Group’s FedWatch tool.
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