El Salvador's bonds suffer as Bitcoin Law takes effect

Bond investors appear to be betting against El Salvador’s controversial Bitcoin Law, but other factors need to be taken into account.

El Salvador’s move to embrace Bitcoin has ruffled the feathers of bond investors, with yields spiking as investors signal uncertainty for the emerging economy.

A Sept. 8 report published by Bloomberg notes the yield curve on El Salvador’s bonds has recently inverted, meaning bonds with short-term maturities are now yielding more than is due from the instruments. It stated:

That’s generally considered a bad sign as it means investors see shorter-term debt as riskier, and most yield curves will slope upwards given the inherent uncertainty of pricing things over the longer-term.

Ben Emons of Medley Global Advisors emphasized that El Salvador’s bonds lost significant ground “on the first day of its new Bitcoin Law,” describing the market action as “an unwelcome sign that the wide use of Bitcoin may have major implications” for the emerging country.

Emons doesn’t appear to be alone in his assessment, with Bloomberg’s data showing that El Salvador’s bonds began moving toward inversion in June — the same month during which the country’s parliament passed President Nayib Bukele’s controversial Bitcoin Law recognizing BTC as legal tender.

However, El Salvador’s move to recognize Bitcoin as legal tender is not the sole force exerting bearish pressure on the country’s bond market.

Other pundits have emphasized Bukele’s sudden ousting of the country’s constitutional tribunal in May as a major source of negative sentiment regarding El Salvador’s economic outlook, with Bukele having fired the country’s attorney general and top judges.

Since May, the spread between El Salvador’s government bonds and comparable U.S. Treasuries had widened by 77% as of August 12. Bukele’s inability to secure a deal with the International Monetary Fund has also impacted the outlook of El Salvador’s bond market.