El Salvador’s Bitcoin bet pays off as bonds surge 62% alongside BTC rally
|- El Salvador’s junk-rated bonds have skyrocketed with Bitcoin’s price rally in 2023 after Fitch predicted a debt default in January.
- The value of El Salvador’s bonds is up 62% in the past six months.
- El Salvador’s bonds outperformed the Invesco Emerging Markets Sovereign Debt, as part of a market-wide trend seen in junk-rated bonds in 2023.
El Salvador, the Central American nation that took a big bet on Bitcoin and the island country, is now enjoying 60% returns in 2023, alongside the BTC price rally. Since President Nayib Bukele declared Bitcoin a legal tender, the prospects of a financing deal with the International Monetary Fund (IMF) dwindled.
Top international credit rating agencies like Moody’s and Fitch downgraded El Salvador’s debt rating in 2022. According to a recent Reuters report, El Salvador’s international bond rally is far from over.
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El Salvador bonds take a 180-degree turn from the summer of 2022
Based on data from Factset, El Salvador’s international bonds have outperformed the Invesco Emerging Markets Sovereign Debt ETF (PCY), one of the largest holders of the country's debt. In mid-2021, the island nation declared Bitcoin as a legal tender, since then there have been frictions with the IMF and credit rating agencies, downgrading El Salvador’s debt rating.
Moody’s predicted that El Salvador would default on its debt in January 2023, yet, at the time of writing, the country’s bonds have rallied upwards of 60% alongside BTC price gain this year. As of April, the island nation holds 2546 BTC, according to a Bloomberg report, and these assets were acquired at $108.2 million.
Aaron Stern, Managing Partner and Chief Investment Officer at Converium Capital, holds Salvadoran bonds since 2022. Stern said,
In the summer of 2022, El Salvador bond prices were divorced from fundamentals. The market was concerned about the administration's willingness to pay.
The country’s debt payback schedule looks light until January 2025, as seen below:
El Salvador’s debt payback schedule
Based on data from an American-British data intelligence firm, Salvadoran dollar bonds currently yield between 14% and 18%. These are the best-performing among sovereign bonds in the first half of the year, with total returns near 60%.
After noting the recent rally, Reuters believes it is not time to cash out yet. Nathalie Marshik, managing director for Latin America fixed income at BNP Paribas, believes El Salvador is uniquely positioned as one of the highest yielding 'performing' distressed credits.
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