By Julia-Ambra Verlaine 

Lebanon's sovereign bonds held steady early Wednesday following a deadly explosion in Beirut that threatened to exacerbate the economic crisis raging in the country.

The blast in the capital port that killed at least 100 people and injured thousands marked the latest hardship to the Middle Eastern state, which defaulted on its debt in March and is struggling to save its economy from financial collapse.

Lebanon missed payment on more than $1 billion of U.S. dollar-denominated bonds in March -- the first time the country ever failed to pay its debt. At the same time the Lebanese government said it would stop paying all commercial foreign currency debt obligations. These total about $31 billion, according to S&P Global. Beirut also skipped interest payments on several bonds in May and June.

Lebanon's bonds due in 2030 trade about 17 cents on the dollar. Credit rating agency S&P Global in July downgraded billions of dollars of bonds coming due between now and 2035, citing a lack of progress on debt-restructuring negotiations between the Lebanese government and creditors.

The largest holders of Lebanese bonds include London-based asset manager Ashmore Group and Fidelity Investments, according to FactSet.

"In the absence of a comprehensive restructuring plan backed by all key political institutions and parties, and external support, we continue to expect the negotiation process will be drawn out beyond 2020," said S&P credit analyst Zahabia Gupta.

Lebanon borrowed heavily over the years from local banks, which used unusually high interest rates to attract dollar deposits from the country's overseas diaspora. Then anticorruption protests shook the country and investors fled. Without the inflow of fresh dollars, Lebanon's financial system began to seize and the country defaulted.

Lebanese debt is a small slice of emerging-market indexes. The Middle Eastern state had 0.37% weighting in JPMorgan's widely tracked EMBI Global Diversified Index as of July 31, down from 0.64% in February. Indonesia, Mexico and China account for the top three in the index.

But the explosion marked the latest difficulty to strike developing markets, which are already under pressure from the global coronavirus pandemic and declining oil prices. Analysts forecast deep economic contractions for many emerging-market economies in 2020 and Argentina this week agreed to a $65 billion restructuring deal with creditors.

Foreign investors piled into emerging-market debt over the past decade seeking higher returns as central banks in developed economies slashed interest rates to stimulate growth. Trillions of dollars of debt around the world carries negative yields, with JPMorgan Chase & Co. research analysts saying the pile has grown in recent weeks.

That made high yields in emerging markets appealing to investors. Debt issued by Lebanon yields up to 7%, while the benchmark 10-year Treasury note traded Wednesday at around 0.54%, according to Tradeweb. Before March, when the coronavirus pandemic sent markets in a tailspin, the 10-year was yielding little above 1%.

(END) Dow Jones Newswires

August 05, 2020 14:25 ET (18:25 GMT)