On Monday, Israel carried out a strike in south Lebanon, resulting in the death of a prominent Hezbollah commander. This event dealt a significant blow following three months of heightened tensions along the Lebanese-Israeli frontier. Additionally, over 130 Hezbollah fighters have lost their lives in the hostilities that began when Hamas, an ally of Hezbollah, initiated an attack on Israel from Gaza on October 7. This conflict, marked by guided rocket launches from Hezbollah and Israeli air and artillery strikes, represents the most lethal confrontation between Israel and Iran-backed Hezbollah since their 2006 war.

 As such, 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), deteriorated throughout the course of this week, by 1.21% to stand at 5.73 points by January 11, 2024. As for the JP Morgan EMBI, it rose by 0.41% to stand at 837.35 by the week of January 11, 2023 compared to 833.97 in the previous week.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds increased respectively by 230 and 205 bps to stand at 166.6% and 117.1%, by the week ending January 11, 2024 compared to the previous week.

US yield curve shifted lower over the course of the week as one, five and ten years yields decreased respectively by 10, 7 and 1 bps to stand at 4.75%, 3.9% and 3.98% by January 11, 2024 compared to the previous week.

In December, US inflation reached 3.4%, signaling a gradual disinflation process. The Bureau of Labor Statistics reported that both headline and core measures of the consumer price index fell short of anticipated disinflation. US inflation hit a low of 3% last June, but has been rising ever since. Nevertheless, the process of disinflation will not be a straight line down, requiring further patience from the Fed before officially transitioning towards an easing cycle.

Former Treasury Secretary Lawrence Summers envisions a potential soft landing as inflation moderates with a strong labor market. Although not guaranteed, he sees it as a real possibility.  After a year of inflation easing steadily, the labor market remains generally healthy, with jobless claims and the unemployment rate historically low.  Meanwhile, investors and economists are expecting the economy to cool this year, prompting the Fed to support growth. Markets are pricing in about 140 basis points of interest rate cuts in 2024, likely beginning in March.

U.S. jobless claims fell unexpectedly by 1,000 to stand at 202,000, lower than forecasted at 210,000, in the week ending January 6, according to a report released by the Labor Department. With the modest decrease, jobless claims fell to their lowest level since hitting 200,000 in the week ending October 14th. Continuing claims, a reading on the number of people receiving ongoing unemployment benefits, also fell by 34,000 to 1.834 million in the week ending December 30th. Another report released by the Labor Department showed employment in the U.S. jumped by much more than expected in the month of December. Meanwhile, unemployment rate came in at 3.7% in December, unchanged from November, contrary to expectations of a slight increase to 3.8%.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an upturn from 16,033 and 11,106 bps to 16,270 and 11,312 bps respectively by the week ending January 11, 2024.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank