Markets Expecting a Close Call Between a 25 bps and 50 bps Rate Cut in Fed’s Meeting Next Week

The BLOM Bond Index (BBI) which is BLOMInvest Bank’s market value-weighted index tracking the performance of the Lebanese government Eurobond’s market (excluding coupon payments), decreased marginally throughout the course of the week by 0.06%, to reach 5.445 points by September 12^th, 2024. However, JP Morgan EMBI rose by 0.42% to stand at 906.94 points on September 12^th, 2024 compared to 903.19 points on September 5^th, 2024.

The yield on the five-year (5Y) Lebanese Eurobonds remained constant at 109% while that of the ten year (10Y) declined by 20 bps to stand at 105.8% by the week ending September 12^th, 2024  compared to the previous week.

US yield curve shifted lower over the course of the week as one, five, and ten years’ yields dropped by 12, 7, and 5 bps to stand at 4.09%, 3.47% and 3.68% respectively on September 12^th, 2024 compared to the previous week, indicating an upward sloping yield-curve for long-dated bonds.

The ten-year US Treasury yield fluctuated over the course of the week after the release of several economic and labor sector data.

The yield on ten-year Treasury bond decreased during the beginning of the week and reached its lowest level since May 2023 where it recorded 3.62% as investors reacted to the debate between US presidential candidates. The analysts suggested that the debate increased the chances for the democratic candidate Kamala Harris to reach the White House, placing more downward pressure on the dollar and Treasury yield due to the anticipation that Trump if reached White House, he will increase tariffs and fiscal spending. Then, the release of the core CPI rose in August above expectation and reached 3.2% annually showing persistent inflation pressures.

On Thursday, US Labor Department released data regarding the labor market that was not encouraging. In details, US initial jobless claims, being the number of people claiming unemployment benefits rose by 2,000 from the prior week to reach 230,000 on the period ending September 7^th but below market forecasts of 231k. Moreover, the continuing jobless claims increased from 1,845 thousands to 1,850 thousands and above market expectations that it will stay constant at 1,845 thousands. Furthermore, the four-week moving average for initial jobless claims that dismiss week-to-week volatility increased to record 230.75 thousands and above market expectations of 230 thousands.

After the core CPI and labor market data that were released this week, and according to CME’s FedWatch today, markets giving a 57% chance of a 25 bps rate cuts in Federal Reserve’s meeting next week against 43% chance of 50 bps rate cut, compared to 85% chance of a 25 bps rate cuts and 15% chance of 50 bps rate cut on Thursday.

It is interesting to mention that as per the Economist issue of September 13^th – September 20^th, 2024, the tightening of monetary policy worked different than the odds. Usually, as interest rates rose, the borrowing expenses rose. However, this time, the companies entered the tightening cycle with a plentiful of cash after the spread of the Covid-19 pandemic that put investment plans on hold. Moreover, American companies borrowed heavily in 2020 and 2021 on long-term deals (three to five years), so even though a rate cut is expected in September, the refinancing will be on rates higher than the original borrowing rates in 2020 and 2021. So, monetary easing will be against the odds too.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable increased by 7 bps to record 10,553 bps while the 10Y spread between the yield on Lebanese Eurobonds and their US comparable decreased by 15 bps to record 10,212 bps by the week ending September 12^th, 2024.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank

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