In a surprising turn of events, El Salvador President Nayib Bukele, who initially caused skepticism among Wall Street due to his embrace of Bitcoin, is now overseeing a remarkable bond rally that is capturing the attention of major financial players.
This year, El Salvador’s global bonds have achieved an astonishing return of over 70%, outperforming other dollar bonds in emerging markets. This impressive performance is drawing the interest of investors who were once cautious or even avoided these securities. Companies such as JPMorgan Chase & Co, Eaton Vance, and PGIM Fixed Income are now recommending or investing in these bonds, predicting a further climb in their value.
JPMorgan research strategists Ben Ramsey, Nishant Poojary, and Gorka Lalaguna recently noted, “Although we missed a significant share of the rally, we still think there’s value across El Salvador’s curve.” The strategists went on to express optimism about the credit’s potential for continued outperformance.
This surge of optimism showcases how President Bukele has managed to secure acceptance from both money managers and his counterparts in Latin America, despite initial reservations about his anti-establishment stance. His tough approach to tackling gangs, which has led to a significant reduction in crime within the country, is resonating throughout the region’s politics. Moreover, his unwavering commitment to honoring bondholder agreements is endearing him to emerging-market investors.
Despite lingering concerns about alleged human rights abuses and his enthusiasm for Bitcoin, which he adopted as an official currency in 2021, Bukele has effectively eased the bond market’s anxieties. He achieved this by orchestrating two debt buybacks, enlisting the expertise of a former International Monetary Fund veteran as an adviser, and even repaying $800 million of bonds.
The substantial yield that investors previously demanded to hold Salvadoran sovereign bonds over equivalent US Treasuries has been slashed by more than half over the past year. In fact, bonds maturing in 2035 and beyond are now trading below the 10 percentage-point threshold typically associated with distressed assets.
El Salvador’s bond performance stands in stark contrast to the 6.6% average return observed across an index of developing nations.
Zulfi Ali, a portfolio manager at PGIM, affirms, “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.”
Apart from JPMorgan, other prominent financial entities, including Eaton Vance, PGIM, Lord Abbett & Co LLC, Neuberger Berman Group LLC, and UBS Group AG, have all joined the ranks of investors in El Salvador’s debt since April.
Mila Skulkina, a money manager at Lord Abbett, praises El Salvador’s prudent management of its balance sheet, including a debt buyback in 2022 and substantial pension reform.
For Shamaila Khan, head of emerging markets and Asia Pacific at UBS Asset Management Americas Inc., the market had previously overstated the risk of future defaults. Khan states, “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.”
However, despite the optimism, some investors remain cautious about the high-risk nature of investing in El Salvador, particularly from 2027 onwards when the nation faces a significant maturity wall. Challenges may arise as the government’s financing options become limited, especially if the market’s sentiment towards risk assets turns negative.
While El Salvador’s journey may entail hurdles, Claudia Calich, the head of emerging-market debt at M&G Investments, remains neutral on the credit due to the medium- and long-term risks. Even as the country manages to navigate the coming years, it will still need to address issues such as limited dollar reserves and access to global capital markets.
“Ultimately, the country will need to start relying on external markets again,” says Claudia Calich.