(Bloomberg) -- Lebanon is entering a crucial week in its years-long search for political stability — and some bondholders are positioning for a rare bit of positive news.
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After 26 months without a president and lacking the policy consensus needed to lift it out of an economic crisis, Lebanon will hold an election among lawmakers on Jan. 9 to appoint a new head of state. While money managers advise abundant caution given the repeated failures of past efforts, bond-market moves show bets are on for a functional government to take over soon and potentially work toward reforms.
The country’s defaulted sovereign dollar bonds rose for a third day on Monday, extending their 5.6% rally in the first two days of trading this year, the most among emerging-market peers. The advances build on a 114% return to bondholders last year, also the biggest in the asset class.
Amos Hochstein, one of US President Joe Biden’s senior Middle East envoys, arrived in Beirut on Monday. He will meet Prime Minister Najib Mikati, Lebanese media reported, as part of American efforts to persuade lawmakers to elect a president this time.
Lebanon’s politicians will need to cross several milestones this month before they can address the economy, begin to recover from a debt default and secure an end to military conflicts. Bondholders are particularly attuned to the fate of a fragile ceasefire between Israel and Hezbollah, the Iran-backed paramilitary and political group that wields significant influence over the country and is considered a terrorist organization by the US. A 60-day truce is set to expire later this month.
“If they can elect a new president, I expect bonds to rally,” said Soeren Moerch, a Copenhagen-based portfolio manager at Danske Bank AS who started buying Lebanese bonds in September. “Electing a president probably means the appointment of a prime minister and a full working government instead of the ‘acting’ government.”
The latest rally has taken Lebanese bonds above 14 cents on the dollar, the highest level since November 2021, from below 6 cents less than a year ago. The country defaulted on its international debt in March 2020, the first country to do so in the multi-billion-dollar distress saga brought on by the Covid pandemic. A series of currency devaluations followed, along with high inflation, a banking crisis and pervasive poverty.