El Salvador's bond market is impacted by Bitcoin law

El Salvador’s move to accept bitcoin has angered bond investors, sending yields soaring as investors signal uncertainty in the emerging economy.

A Bloomberg report published on September 8 noted that the yield curve for El Salvador’s bonds recently inverted, meaning that short-term bonds are currently paying more than the yield to maturity of the instrument. The report stated:

“This is generally considered a bad sign because it means investors view shorter-dated bonds as riskier, while most yield curves will be upward sloping given the inherent uncertainty in long-dated pricing.”

Ben Emons of Medley Global Advisors highlighted that El Salvador’s bonds fell sharply on “the first day of its new Bitcoin law,” describing this market behavior as “an ominous sign that widespread Bitcoin adoption could have a significant impact on this emerging country.”

Emons doesn’t appear to be alone in this view, as data from Bloomberg shows that El Salvador’s bonds began moving toward an inversion in June, the same month the country’s parliament passed the country’s president, Nayib Bukele’s controversial Bitcoin law, recognizing BTC as legal tender.

However, El Salvador’s move to recognize Bitcoin as legal tender is not the only force exerting bearish pressure on the country’s bond market.

Other experts highlighted Bukele’s abrupt overthrow of the country’s Constitutional Court last May as a major source of negative sentiment for El Salvador’s economic outlook, with Bukele having already sacked the country’s attorney general and senior judges.

Since May, the spread between Salvadoran government bonds and U.S. Treasuries has widened 77% as of August 12. Bukele’s inability to reach an agreement with the International Monetary Fund has also affected the outlook for the Salvadoran bond market.

While El Salvador’s Bitcoin law came into effect on September 7, citizens have widely complained about technical issues during the rollout of the country’s government-issued “Chivo” digital wallet.