El Salvador’s decision to embrace Bitcoin has ruffled bond investors’ feathers. Although, the Bitcoin law seems to be the main reason, other factors need to be taken into account.
According to a Bloomberg story published on Sept. 8, the yield curve on El Salvador’s bonds has just inverted, indicating short-term bonds are now yielding more than they are due. It reads:
“That’s generally considered a bad sign as it means investors see shorter-term debt as riskier, and most yield curves will slope upwards given the inherent uncertainty of pricing things over the longer-term.”
El Salvador’s bonds lost considerable ground “on the first day of its new Bitcoin Law,” according to Ben Emons of Medley Global Advisors, who described the market action as “an unhappy warning that the widespread adoption of Bitcoin may have major ramifications” for the young country.
El Salvador’s bonds began sliding toward inversion in June, according to Bloomberg statistics, the same month that President Nayib Bukele’s controversial Bitcoin Law recognizing BTC as legal cash was passed by the country’s parliament.
El Salvador’s decision to recognize Bitcoin as legal cash is not, however, the only factor putting downward pressure on the country’s bond market.
Other analysts have pointed to Bukele’s abrupt removal of the country’s constitutional tribunal in May as a key source of concern about El Salvador’s economic prospects, noting that Bukele also sacked the country’s attorney general and top judges.
As of August 12, the difference between El Salvador’s government bonds and equivalent US Treasury bonds has increased by 77% since May.
The failure of Bukele to reach an agreement with the International Monetary Fund has harmed El Salvador’s bond market.
While El Salvador’s Bitcoin Law went into effect on September 7, citizens complained about technological challenges with the government-issued “Chivo” digital wallet.