Investors have been impressed with the impressive performance of El Salvadoran government bonds, which have surged a staggering 62% over the past six months. The adoption of Bitcoin as an accepted payment mechanism has marked a dramatic improvement in the country’s financial situation.
El Salvador’s sovereign debt rises An unexpected and surprising correlation between the two commodities has been demonstrated along with the rise in Bitcoin price. The rise in Bitcoin price was caused by the emergence of Exchange Traded Funds (ETFs).
El Salvador’s choice to adopt Bitcoin as part of its economy has improved the country’s financial situation and demonstrated how positively cryptocurrencies can impact established economic systems.
As high-end cryptocurrency prices rebounded due to growing investor interest in ETFs, the country’s bonds surged to unprecedented highs, demonstrating the newfound economic potential and importance of digital currencies globally.
Source: TradingView
Cryptocurrencies reshaping the economy
This unexpected combination of Bitcoin and national bonds has provided a motivating case study for investors and governments around the world, sparking more important research into the functioning of cryptocurrencies in reshaping the modern financial landscape.
In mid-2021, El Salvador declared Bitcoin legal tender and began stockpiling digital currencies. According to Bloomberg statistics, the public held 2,546 bitcoins as of April. A digital asset that cost $108.2 million to buy is now worth $76.6 million, according to the latest market data.
When El Salvador decided to adopt Bitcoin as a form of currency and start accumulating it, it didn’t go very well. Both rating agencies and the International Monetary Fund continued to voice their disapproval of the move.
Bitcoin drops below the key $30K region. Chart: TradingView.com
Meanwhile, the Invesco Emerging Markets Sovereign Bond ETF (PCY), one of El Salvador’s largest government bond holders, has underperformed the country’s international bonds, according to FactSet figures.
The country said in January that it had repaid $800 million in bonds that Moody’s had predicted could never be repaid.
El Salvador’s debt rating will drop in September 2022, with a possible default in January 2023, according to projections. Since then, the price of the country’s junk-rated bonds has followed Bitcoin’s lead.
About Debt Ratings and Junk Bonds
A debt rating is an assessment provided by rating agencies such as Fitch and Moody’s to assess the creditworthiness and risk associated with a country’s or company’s debt securities (such as bonds). This rating helps investors and creditors determine the likelihood that an issuer will default.
“Junk-rated bonds” are bonds rated below investment grade (usually BB or lower), indicating a high risk of default. The rise in the value of these bonds suggests that investors may have become more optimistic or that market conditions have pushed bond prices higher despite heightened risks.
Bitcoin is about to cross $30,000
Bitcoin price There is currently strong resistance near $31,000, a significant gain from 2022’s performance despite struggling to hold above $30,000.
Bitcoin is trading at $29,840 at the time of writing, down 1.1% over the past 24 hours and nearly 5% in value over the past seven days, according to data from crypto market tracker Coingecko.
A more general market trend seems to emerge in the recent changes in Salvador’s bond fortunes. Notably, compared to investment-grade bonds earlier this year, junk-rated bonds in the country, as well as other countries such as Turkey, Argentina and Nigeria, have performed noticeably better.
There are growing signs that the fate of El Salvador’s bond market is not an anomaly but part of a more pronounced pattern affecting other emerging markets.
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