El Salvador's bonds surge 62% amid Bitcoin's ETF-driven rally

There is an old saying in the market that ratings of traditional agencies are lagging indicators. Bitcoin holder El Salvador’s recent experience suggests the same.

Since Fitch downgraded El Salvador’s debt rating in September 2022 with a prediction of a debt default in January 2023, the country’s junk-rated bonds have skyrocketed, mirroring Bitcoin’s meteoric rise throughout 2023.

BTC vs El Salvador bond (TradingView)

According to market data, the value of El Salvador’s bonds are up 62%, and now trading at 72 cents on the dollar. During the same time period, bitcoin has risen 79%.

El Salvador’s bonds have even outperformed the Invesco Emerging Markets Sovereign Debt ETF (PCY), one of the largest holders of the country’s debt, according to Factset.

In January, the country announced it had repaid an $800 million bond which Moody’s predicted it would be unable to do.

El Salvador announced Bitcoin as legal tender in mid-2021 and began accumulating the cryptocurrency from September 2021. As of April, the country holds 2546 bitcoin, according to calculations by Bloomberg. The digital assets were bought for $108.2 million, and are currently worth $76.6 million per current market data.

Separately, Volcano Energy recently announced $1 billion in commitments to build a 241 megawatt (MW) bitcoin mine in the Metapán region of El Salvador. Investors include Tether, the issuer of USDT.

Ratings agencies disapprove

El Salvador's decision to diversify into bitcoin has consistently drawn the ire of ratings agencies and the International Monetary Fund.

“Policy differences related to the government’s embrace of bitcoin have lowered the probability that an IMF (International Monetary Fund) deal will be reached in time to address the government’s upcoming January 2023 $800 million bond maturity,” Moody’s wrote last fall.

In 2021, S&P wrote that El Salvador’s decision to adopt bitcoin as a legal tender would have “immediate, negative implications.”

“The risks” of El Salvador’s bitcoin adoption “seem to outweigh its potential benefits,” S&P wrote at the time. “There are immediate negative implications for (the) credit.”

In February, the IMF said that risks regarding El Salvador’s embrace of bitcoin "have not materialized due to the limited bitcoin use so far."

"Given the legal risks, fiscal fragility and largely speculative nature of crypto markets, the authorities should reconsider their plans to expand government exposures to bitcoin," the IMF said in a statement, reported by Reuters.

The change of fortune for Salvador’s bonds appears to be a part of a market-wide trend. Junk-rated bonds of Turkey, Argentina and Nigeria also outperformed investment-grade bonds early this year.