Lebanese Bonds Soar as Presidential Election Brings Hope

The BLOM Bond Index (BBI), which tracks Lebanese government Eurobonds (excluding coupon payments), went up by 24.13% this week to 16.85 points, continuing its three-month rally. This rise followed the election of Lebanese Army chief Joseph Aoun as president, ending a two-year presidential vacuum. Investors view this election as a sign of stability for a country facing multiple crises since 2019.

In his acceptance speech, Aoun promised a new era for Lebanon, aiming to solve the country’s economic and political problems. He also vowed to ensure the state’s exclusive control over weapons, referring implicitly to Hezbollah. Hezbollah has become weaker lately because it incurred major losses in its war with Israel. Additionally, the fall of its ally, Syrian President Bashar Al-Assad, has added further pressure on the group. This weakening suggests that the two-month ceasefire with Israel might lead to a permanent end of the war,  despite the persistence of Israeli breaches to the deal, especially given that Aoun secured the presidency amid international support from several regional and international countries, including the US.

However, filling the presidential position alone isn’t enough. The Taif Agreement reduced many of the president’s authorities. The president also needs to choose a new Prime Minister, who will then form a new government. Even if Hezbollah and its allies don’t use their veto to block this process, the composition of this cabinet and the ministries they control will greatly influence the country’s future. This includes the chance of reaching an agreement with the International Monetary Fund (IMF), which could help lift Lebanon out of default.

Bank of America (BofA) strategists wrote that this election could lead to global commitments of reconstruction and financial support that facilitate reforms. But they warned that when bonds prices reach 20 cents, many people might start selling, so the price increase probably won’t last in the medium-term.

That said, almost five years have passed since the Lebanese government defaulted on its Eurobonds obligations. It is interesting to mention that if bondholders fail to pursue legal action against the state within five years, they lose their right to claim interest on Eurobonds. To avoid legal action, Lebanon’s Council of Ministers approved extending the prescription periods till March 2028. Lebanese Finance Minister Yousef Khalil said, “holders of the Eurobonds will not be forced to take legal action due to a legal deadline, but will rather participate in an orderly and consensual process.”

When bond prices go up, yields go down. Consequently, the yield on 5-year bonds fell by 1,330 basis points to 90.3%, and the yield on 10-year bonds decreased by 970 basis points to 65.9% this week.

In the U.S., treasury yields for 5-year, and 10-year bonds rose this week by 8 and 11 basis points, reaching 4.46% and 4.68% on January 9, 2025. This increase comes as investors await the release of the December nonfarm payrolls data that might influence the Federal Reserve’s monetary policy. In addition, there is increasing worries about rising budget deficits under Trump.

The minutes for the latest Fed meeting, released on Wednesday, pointed to a potential slowdown in rate cuts in 2025 amid rising inflation concerns and due to the impact of the new US president Donald Trump’s policy changes.

Amid these developments, traders are now pricing in only 6.9% chance of a quarter-point rate cut at the Federal Reserve’s 29 January meeting, while the likelihood of no change is 93.1%, according to the CME Group’s FedWatch tool.

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