El Salvador President Nayib Bukele scared off many on Wall Street by embracing Bitcoin. Two years later, the bond rally he’s overseeing is proving too lucrative to resist.
(Bloomberg) — El Salvador President Nayib Bukele scared off many on Wall Street by embracing Bitcoin. Two years later, the bond rally he’s overseeing is proving too lucrative to resist.
Eye-popping 70% returns — the best among dollar bonds from emerging markets this year — are attracting investors who were once cautious or avoiding the securities altogether. JPMorgan Chase & Co, Eaton Vance and PGIM Fixed Income are among those who have recommended or bought the debt, betting it will continue climbing.
“Although we missed a significant share of the rally, we still think there’s value across El Salvador’s curve,” JPMorgan research strategists Ben Ramsey, Nishant Poojary and Gorka Lalaguna wrote in a July note, moving overweight on the debt. “There’s room for this credit to keep outperforming.”
The optimism demonstrates how Bukele has gained acceptance from both money managers and his peers in Latin America after many had dismissed him as an anti-establishment maverick. His hard-line stance on gangs, which has dramatically cut crime in the country, is influencing politics throughout the region. And his commitment to paying bondholders is making him a favorite among emerging-market investors.
While concerns remain over alleged human right abuses and his obsession with Bitcoin — which he adopted as an official currency in 2021 — Bukele has assuaged the bond market’s worst fears by engineering two debt buybacks, hiring a former International Monetary Fund veteran as an adviser and repaying $800 million of bonds.
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The extra yield investors demand to hold Salvadoran sovereign bonds over similar US Treasuries has more than halved in the past year. Notes maturing in 2035 and thereafter are trading below the 10 percentage-point threshold to be considered distressed.
The country’s bond performances compares to a 6.6% average return across an index of developing nations.
“The story continues to be positive on the fiscal accounts and Bukele has continued to be very consistent in signaling to bondholders that he’s serious about paying the debt,” said Zulfi Ali, a portfolio manager at PGIM.
Besides JPMorgan, Eaton Vance and PGIM, Lord Abbett & Co LLC, Neuberger Berman Group LLC and UBS Group AG have added the debt since April, according to data compiled by Bloomberg.
“El Salvador has benefited from proactive and prudent management of its balance sheet, including a debt buyback during the second half of 2022 and material pension reform,” said Mila Skulkina, a money manager at Lord Abbett.
For Shamaila Khan, head of emerging markets and Asia Pacific at UBS Asset Management Americas Inc., the market was overpricing the risk of future defaults.
“The policy mix was a lot more favorable and it implied that the default risks in the coming months and possibly years are not as high as what was priced into the market,” Khan said.
Read more: Hedge Fund Bets There’s Value in El Salvador After 180% Bond Run
Still, for some investors, El Salvador remains a high-risk trade, especially starting in 2027 when the nation faces a large maturity wall. The government doesn’t have much freedom in its financing plan and may have difficulty navigating if the market turns more negative on risk assets, said Katrina Butt, a senior economist at AllianceBernstein in New York.
Notes maturing in 2027, 2029 and 2032 are still trading at distressed levels.
Due to the medium- and long-term risks, Claudia Calich, the head of emerging-market debt at M&G Investments, has stayed neutral on the credit.
Even if the country manages to pull through the next couple of years, it faces a series of issues including limited dollar reserves and questions over whether it can access global capital markets.
“Eventually we’d need to talk about not only a situation about liquidity but we’d also need to address good policy making,” Calich said. “Ultimately, the country will need to start relying on external markets again.”
–With assistance from Maria Elena Vizcaino and Carolina Wilson.
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