El Salvador’s Bonds and Bitcoin’s Synchronized Rise

There is a proverb that states that traditional agency ratings frequently lag behind current trends in the quick-paced world of financial markets. Recent events in El Salvador involving its debt rating and bitcoin have offered a startling illustration of this phenomena.

Fitch cut El Salvador’s debt rating in September 2022 and even foresaw a default in January 2023. However, something very unexpected took place. The nation’s junk-rated bonds bucked the odds and rose in value, much like bitcoin’s extraordinary rise during 2023, despite the downgrading and prognosis.

El Salvador’s Bond Rally

El Salvador’s bonds have impressively increased by 62%, according to market statistics, and are now selling at 72 cents on the dollar. It’s interesting to note that at the same time, the value of bitcoin increased significantly by 79%.

This link is made even more noteworthy by the fact that, according to Factset, El Salvador’s bonds have outperformed the Invesco Emerging Markets Sovereign Debt ETF (PCY), a prominent holder of the nation’s debt.

El Salvador surprised everyone by successfully repaying a $800 million bond in January, a performance that Moody’s had earlier stated would be impossible.

This unexpected turn of events is a result of the nation’s ground-breaking choice to accept bitcoin as legal cash in the middle of 2021. Since September 2021, El Salvador has been aggressively accumulating cryptocurrencies. The nation has impressively acquired 2546 bitcoins as of April, which cost $108.2 million in total. Based on recent market statistics, these digital assets now have a worth of $76.6 million.

The intertwined narrative of El Salvador’s bonds and the rise of bitcoin illustrates how resilient and adaptable the financial industry can be. It exemplifies how making unusual choices can result in unanticipated results, upending conventional market expectations and preconceptions.

This incident serves as a warning that the market is always shifting and that occasionally, even the most trusted indicators may fall short of adequately capturing the dynamic and transforming character of certain commodities like bitcoin. Now that a nation’s bonds and a digital currency have such an unusual association, investors and observers must consider the possible ramifications.