NEW YORK, Aug 12 (Reuters) - Spreads on dollar-denominated El Salvador bonds hit their highest level since November on Thursday, with some investors seeing an opportunity as yields flash double-digits across the curve.
Government bond spreads to comparable U.S. Treasuries rose to 920 basis points (bps), up almost 400 bps since early May, when the coalition that backs President Nayib Bukele removed top judges and the country’s attorney general, a move the United States called unconstitutional.
Bond prices continue to fall, weighed by investor concerns over government financing as a deal with the International Monetary Fund has not materialized, while unknown consequences linger over a soon-to-be-enacted law making bitcoin legal tender.
But some investors see prices as attractive, with the risk/reward hinging on the outcome of IMF negotiations.
“The Bukele administration has control of both the executive and legislative branches and therefore has the ability to implement the structural reforms required by the IMF as well as adjust the fiscal trajectory as required,” Shamaila Khan, head of emerging market debt at AllianceBernstein, told the Reuters Global Markets Forum on Thursday.
“Despite the headlines, we think that the country will show commitment to the IMF program,” she added, noting that at current levels prices are attractive.
The IMF did not respond to a request for comment.
JPMorgan said in a recent note that higher economic growth and tax revenues, hand-in-hand with lower spending, could allow El Salvador to meet its financing needs for this year even without an IMF deal.
The Wall Street bank projects economic output growing at a 10.9% annualized rate, compared to the IMF’s expectation of 4.2% real GDP growth in 2021.
The current yields suggest an attractive risk/reward according to Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, but “not yet a buying opportunity until there is clarity on the funding program.”
Citi analysts said last week they “remain underweight in our model portfolio going back to Bukele’s ousting of the constitutional tribunal in early May.”
Reporting by Rodrigo Campos in New York and Lisa Pauline Mattackal in Bengaluru; Editing by Leslie Adler
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