Political Interference and Sectarian Rallies Weigh on Lebanese Bonds

The BLOM Bond Index (BBI), which tracks Lebanese government Eurobonds (excluding coupon payments), declined by 4.6% this week to 16.45 points. This drop followed the extension of the ceasefire with Israel until February 18, continued Israeli breaches of the truce agreement, delays in forming a new Lebanese government, political interference aimed at creating a government based on pie-sharing politics, and increased sectarian tensions following Hezbollah supporters’ rallies in Beirut on Sunday.

On Sunday, Hezbollah supporters conducted rallies in Beirut, including in Christian-majority neighborhoods, escalating sectarian tensions. These rallies followed the return of residents, mainly Shi’ites, to southern Lebanon, prior to the official announcement of the ceasefire extension. After trying to return to villages still occupied by Israeli soldiers, dozens of people were shot and killed.

Due to persistent instability, Emirati billionaire Khalaf Ahmad Al Habtoor, head of Dubai conglomerate Al Habtoor Group, announced on X on Tuesday the cancellation of all future investments in Lebanon and plans to divest all his assets there. He added, “The continued dominance of armed militias and the failure to establish rule of law make it impossible for any investor to proceed with confidence in such an environment.”

On the political front, most political parties are pressuring the new Lebanese PM Nawaf Salam to include ministers named by traditional, sectarian political groups, threatening the possibility of building a reformist government. Perhaps the biggest pressure comes from naming the finance minister. The Shiite duo Amal and Hezbollah have lately held this ministry and are insisting on retaining it in this government as well. In addition, according to five sources informed by Reuters, Washington is pressuring senior Lebanese officials to block Hezbollah and its allies from selecting the next finance minister, aiming to reduce the Iran-backed group’s control over the government. It is important to highlight the significance of this ministry, as the finance minister signs off on every new decision involving money, including hiring people for new governmental positions like judges and any new projects in Lebanon that involve financial resources. Giving the finance ministry to Hezbollah and Amal again could cause controversy, as Lebanon aims to start fresh with a president and prime minister who are seen as independent from the old ruling elite, often blamed for the country’s many problems. Lebanon also urgently needs financial support to address an economic crisis that began in 2019 and was worsened by the war between Hezbollah and Israel, which caused billions of dollars in damage. Lebanon risks losing global support if the finance ministry is controlled by Hezbollah and Amal.

On Wednesday night, Mr. Salam, after meeting with President Joseph Aoun, emphasized that his government would not be made up of political party figures and stressed that no decisions had been finalized, adding, “no ministry is exclusive to a certain sect and no ministry is prohibited to a certain sect”.

When bond prices go down, yields go up. Consequently, the yield on 5-year bonds rose by 295 basis points to 92.75%, and the yield on 10-year bonds increased by 250 basis points to 67.5% this week.

In the U.S., treasury yields fell this week as Q4 2024 GDP growth came in below expectations. The yields for 5-year and 10-year bonds declined by 14 and 13 basis points, respectively, reaching 4.31 and 4.52% on January 31, 2025.

The yield drop came after it was announced that the U.S. economy grew by 2.3% in Q4 2024, falling short of the 2.5% growth forecasted by economists surveyed by Dow Jones. This shortfall increases the likelihood of interest rate cuts. Despite the lower-than-expected growth, the economy showed strong performance driven by resilient consumer spending.

On Wednesday, the U.S. Federal Reserve kept interest rates unchanged at 4.25%-4.5%, as anticipated, following three consecutive rate cuts since September 2024. This decision came despite US President Donald Trump’s calls for lower interest rates during his address at the World Economic Forum in Davos, where he subtly referenced the Fed. Policymakers stated they would need to see “real progress on inflation or some weakness in the labor market” before considering further adjustments.

From a policy perspective, Trump announced plans to impose 25% tariffs on Mexico and Canada starting February 1, while a 10% tariff on Chinese goods is still under consideration. Markets are now closely monitoring developments concerning these measures.

Amid these developments, traders are now pricing in a 16% chance of a quarter-point rate cut at the Federal Reserve’s 29 January meeting, while the likelihood of no change is 84%, according to the CME Group’s FedWatch tool.

Disclaimer:
This article is a research document that is owned and published by BLOMINVEST BANK SAL.
No material from this publication may be modified, copied, reproduced, repackaged, republished, circulated, transmitted or redistributed directly or indirectly, in whole or in any part, without the prior written authorization of BLOMINVEST BANK SAL.
The information and opinions contained in this document have been compiled from or arrived at in good faith from sources deemed reliable. Neither BLOMINVEST BANK SAL, nor any of its subsidiaries or affiliates or parent company will make any representation or warranty to the accuracy or completeness of the information contained herein.
Neither the information nor any opinion expressed in this research article constitutes an offer or a recommendation to buy or sell any assets or securities, or to provide investment advice.
This research article is prepared for general circulation and is circulated for general information only.