Smaller Than Expected Rate Hike By Fed Made T-Bills Booming Again

The Lebanese Eurobonds market is still recording an all-time worst performance and wavering around the 7 cents during the course of the week. A damning statement from the IMF on Thursday about Lebanon and its leaders for lack of reforms as well as about the incompetence in dealing with the ongoing crisis. The IMF also stated that the country is in very dangerous situation with reforms stalled and the authorities should accelerate the implementation of the conditions set for the $3B bailout. In fact, IMF statement shows the extent of how far we are from implementing a rescue package and undertaking any reforms to pull the country out of the crisis.

Consequently, 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 further this week by 1.41% to stand at 7.01 points by the week ending March 23, 2023. As for the JP Morgan EMBI, it increased by 0.80% to stand at 782.18 by the week of March 23, 2023 compared to 776.01 by the end the week of March 16, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds jumped by 200 and 170 basis points (bps) to stand at 132.60% and 103.75% respectively by the week ending March 23, 2023, compared to the previous week.

As for the US Bonds market this week, investors have been turning to safe heaven investments such as Treasuries and Gold after the collapse of Silicon Valley bank and Credit Suisse’s struggles. As such, T-Bills prices are booming especially after the second meeting of the FOMC this year and its decision to raise interest rate by another 25 bps to 4.74%-5%, the highest level since September 2007. However, the increase in Fed Fund interest rate is smaller than expected signals increases are near to end. The Fed policymakers projected rates would end 2023 at about 5.1% while the median 2024 projection rose to 4.3% from 4.1%.

The Federal Reserve remains highly attentive to inflation risks and it continues to use interest rate tools to combat the sticky high inflation. Nevertheless, the FOMC showed a notable change in language in the policy statement is notable as it no longer says the committee expects ongoing increases in interest rates, instead they expect some additional policy firming with most FOMC members see the fed funds rate as approaching sufficiently restrictive territory. The FOMC expressed its understanding for the last week’s event at the banking sector and stated that it was too soon to tell how much recent banking stress would slow down the economy.

In fact, with the FOMC making one year of consistent rate increases, the US T-bills yields took another wild swing with the 6M T-bills dropping by 14 bps to 4.80% while the 2Y T-bills yield fell weekly by 38 bps to 3.76% by the week ending March 23, 2023. In addition, the 1Y T-bills are granting now a 4.38% return compared to last week return of 4.94%. Similarly, the longer term yields dropped this week with 5Y and 10Y recorded a downtick of 33 bps and 18 bps, respectively, to stand at 3.39% and 3.38% by March 23, 2023.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 12,688 and 9,849 bps to 12,921 and 10,037 bps respectively by the week ending March 23, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank