Citi Group: Selling Lebanese T-Bills On Syria Unrest

Citi Group said that the sell-off witnessed by Lebanese sovereign assets following clashes reflects an exaggerated fear of spillovers from the conflict in Syria. It added that after the eruption of the violence, Lebanese sovereign assets were sold off in significant numbers in the last few weeks.

The spread on short-dated Lebanese Eurobonds in particular has risen sharply, by almost 200 basis points at their widest.

Citi said that such market jitters are attributed to two factors. First, recent events have raised fears of violence in Syria spilling over to Lebanon. This has dampened demand from both international and local sponsors, thus driving yields up. But, Citi ruled out the eruption of nationwide conflict at this stage.

Second, the market may be reflecting plans by the Central Bank to increase net issuance of government debt by $2 billion in 2012.

Citi believes that the consistent tightening in yields in recent years is attributed to the fact that there has been no net issuance by the government, with the stock of outstanding Eurobonds more or less static around $20 billion over the past five years.

Meanwhile, dollar deposits in domestic banks, the main sponsor of Lebanon’s Eurobonds, have grown at an average rate of 10 percent annually.

This means there has been increasing demand for a limited set of outstanding paper, with the net result being a consistent downward pressure on yields.

Citi added that the issuance plans should relieve some of this pressure in the near term, but this wouldn’t be the beginning of a borrowing spree by the government, The Daily Star reported.