El Salvador President Nayib Bukele initially unsettled many in the financial world with his endorsement of Bitcoin; however, his current oversight of a surging bond rally has proven too enticing to resist. Exceptional returns of around 70% — the highest among emerging market dollar bonds this year — are luring investors who were once cautious or completely avoiding these securities, Bloomberg reported.
Notable entities such as JPMorgan Chase & Co, Eaton Vance and PGIM Fixed Income have either recommended or purchased this debt, banking on its potential for continued growth.
"There’s room for this credit to keep outperforming,” JPMorgan research strategists Ben Ramsey, Nishant Poojary and Gorka Lalaguna wrote in a July note.
This positive sentiment reflects how Bukele has secured recognition from both financial managers and his counterparts in Latin America, even after many initially regarded him as a nonconformist who defied established norms. His uncompromising stance against gangs, which significantly reduced crime rates in the country, is influencing political dynamics across the region. Moreover, his dedication to honoring bond commitments is elevating his standing among emerging market investors. Despite lingering concerns regarding alleged human rights violations and his preoccupation with Bitcoin — which he adopted as an official currency in 2021 — Bukele has allayed the most significant fears of the bond market. He orchestrated two debt buybacks, enlisted the counsel of a former International Monetary Fund expert and repaid $800 million in bonds.
The yield premium that investors demand to hold Salvadoran sovereign bonds over comparable U.S. Treasuries has decreased by over half in the past year. Bonds maturing in 2035 and beyond are trading below the threshold of 10 percentage points typically associated with distress. El Salvador's bond performance outpaces the 6.6% average return observed across a developing nations index. Besides JPMorgan, Eaton Vance and PGIM, other prominent names such as Lord Abbett & Co LLC, Neuberger Berman Group LLC and UBS Group AG have incorporated this debt into their portfolios since April, according to data compiled by Bloomberg. Shamaila Khan, head of emerging markets and Asia Pacific at UBS Asset Management Americas Inc., expressed her belief that the market was overestimating the risk of future defaults, emphasizing that the policy mix indicated a lower likelihood of defaults than what the market had factored in.
