Move over, bitcoin: El Salvador’s sovereign bonds haven’t finished rallying

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NEW YORK, July 19 (Reuters) – Investors in Salvadoran international bonds are relishing returns of 60% this year alone as debt issued by the Central American country recovers from calls for disaster and default, some are betting that the recovery is not quite over yet.

Rising tensions between Washington and President Nayib Bukele’s government, dwindling prospects for a financing deal with the International Monetary Fund (IMF), and the fallout from bitcoin becoming legal tender amid a broader and challenging macroeconomic backdrop had seen El Salvador bonds fall to a quarter of their face value. last July.

Twelve months later and two surprise debt buybacks have left the country’s payment schedule very light until 2027, while the appointment of a former IMF official as an adviser to the Ministry of Finance has sent the right signal to the markets, according to investors. A bond maturing in 2025 is trading at 89 cents, down from about 27 cents a year ago.

“In the summer of 2022, El Salvador bond prices were separated from fundamentals,” said Aaron Stern, managing partner and chief investment officer at Converium Capital in Toronto, which has held the country’s bonds since last year.

“The market was concerned about the administration’s willingness to pay,” he said, but even now El Salvador offers attractive value compared to a number of better-priced emerging-market sovereigns.

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The appointment of former IMF chief Alejandro Werner has revived hopes that an IMF deal could eventually materialize – and in the meantime the country could see a more structured policy.

“Bukele has one of the highest approval ratings and he’s been successful, and there’s also an understanding of making sure the country continues to have market access…it’s a dollarized economy,” said Shamaila Khan, head of fixed income for emerging markets and Asia-Pacific, UBS Asset Management.

El Salvador’s debt-to-output ratio stood at 77% in December, the lowest since 2019, and is expected to fall another percentage point this year before rising to 78% in 2024, according to Refinitiv data. . Total public debt was $19.7 billion in May, down from $25.4 billion at the end of 2022.

Salvadoran dollar bonds are currently yielding between 14% and 18%, according to data from Refinitiv. These are the best performing sovereign bonds in the first half of the year, with total returns close to 60%. And even after such a run, some say it’s not yet time to cash in.

“In a year where carry is the main driver of total returns, investors are going to be reluctant to take profits too soon,” said Nathalie Marshik of BNP Paribas, managing director of fixed income in Latin America.

“El Salvador is in a somewhat unique position as one of the best performing ‘performing’ troubled credits,” she said, adding that it would take a “significant” fiscal deterioration or a change in your policy towards the bond market to stage another sale. .

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JPMorgan moved its recommendation on the country’s hard currency debt from “overweight” to “market weight”, saying “the country’s external and fiscal position looks constructive in the near term.”

Some wonder how much longer history has to go, with presidential elections in February raising concerns over fiscal prudence as Bukele seeks re-election which is now allowed after a friendly court ruling.

“Ideally, a policy adjustment would be announced soon after the election to appease the market, as the current confusion in policy will be difficult to repeat in 2024,” Marshik said.

Reporting by Rodrigo Campos; edited by Karin Strohecker, William Maclean

Our standards: The Thomson Reuters Trust Principles.

Rodrigo Campos is based in New York. It covers economic and financial news from global emerging markets – from Argentina and Turkey to the BRICs, from El Salvador to Suriname and Ghana. Rodrigo previously covered the US stock market for Reuters and reported for Colombian daily El Tiempo covering arts and culture.

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