Bitcoin Backer El Salvador Bonds Are a Top EM Trump Trade

(Bloomberg) — It’s a worrying combination for some: Donald Trump back in the White House and a brazen Central American president who has declared himself the world’s coolest dictator.

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But the way bond investors see it, Trump’s election could be a lucrative trade for El Salvador’s Nayib Bukele, who they believe could help El Salvador unlock billions of dollars in funding from multilateral institutions such as the International Monetary Fund, which has so far been wary of lending to a country that uses Bitcoin as its official currency.

“El Salvador is a net trade,” said Chris Preece, portfolio manager at Pictet Asset Management, under that scenario. “If Trump joins, the impediment that Bitcoin poses to El Salvador’s relationship with the IMF becomes less of an issue.”

Dollar bonds from the Central American country have outperformed, returning 2.8% to investors since June 27, when President Joe Biden’s mediocre debate performance prompted money managers to scramble to boost Trump’s chances of winning. The bonds rose across the curve on Tuesday, with securities maturing in 2035 up 0.2 cents on the dollar, according to benchmark pricing data compiled by Bloomberg.

Besides El Salvador trade, emerging market investors are also predicting the dollar will gain value as Asian currencies and the Mexican peso take a hit due to Trump’s immigration and trade rhetoric.

The 42-year-old Central American president, who was re-elected this year with nearly 85 percent of the vote, has had a volatile relationship with the U.S. government since Biden refused to host him at the White House in 2021 amid growing criticism of Bukele among Democrats.

Bukele has repeatedly defended Trump on X, including criticizing the former president’s impeachment in 2023 and suggesting it would be hypocritical for the U.S. to promote democracy with its foreign policy. After the attempted assassination of Trump, Bukele took to social media to write “Democracy?” to X. His office later joined other governments in condemning the attack.

He has involved himself in Trump’s reelection campaign; he has invited several prominent conservative political figures to Trump’s inauguration, including Trump’s son; and he also spoke at a conservative gathering outside Washington earlier this year.

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Investors have assumed for months that Bukele was stalling, waiting for Trump’s return to Washington. While the Republicans’ fiscal plans have spooked some investors, a friendlier face in the White House could tip the balance for El Salvador and pave the way for a deal with the IMF after three years of talks. The U.S. is the International Monetary Fund’s largest shareholder and must vote in favor of the loans before the money is distributed.

“I sympathize with the El Salvador view more than any other transaction because there is actually a path to get an IMF deal,” said Arif Joshi, a fund manager at Lazard Asset Management. “The real obstacle to getting this program across the finish line is actually the Bitcoin issue.”

Fund officials have repeatedly warned the country about the risks of using Bitcoin as legal tender if it wants IMF dollars, urging it to abandon Bitcoin. Bukele, for his part, has refused to call off the cryptocurrency experiment.

The IMF said in an email that ongoing talks with Salvadoran authorities aim to reach a new agreement that will strengthen public finances, improve reserve buffers and boost efficiency.

“Addressing risks arising from the Bitcoin project is a key element of our discussions,” a representative for the fund wrote.

While the IMF’s mission is to promote global growth and financial cooperation among countries, it often serves U.S. political interests. Consider the record $57 billion bailout that Argentina received from the fund in 2018 under business-friendly President Mauricio Macri.

“The U.S. has a lot of leverage in terms of the IMF,” said Anthony Kettle, senior portfolio manager at RBC Bluebay. “I see people now wanting to hold on to some kind of positive reform narrative, and when you include the IMF in general, that’s a pretty positive sign.”

The Trump campaign did not respond to requests for comment. Representatives from the Bukele administration and the finance ministry declined to comment.

El Salvador has a debt burden of around 70% of GDP, including debt to pension funds, and public finances remain fragile, reflecting long-term structural weaknesses, according to S&P Global Ratings. A deal with the IMF would unlock more funds tied to economic reforms and give investors confidence that the country’s debt is manageable over the medium term.

The fiscal deficit will fall to 3.9% of GDP this year from 4.7% as spending on wages and capital investment increases, according to Fitch Ratings. Moody’s Ratings said in May that the country lacked a strategy to address high financing costs and identify financing to meet debt obligations over the medium term.

“They’ve shown a very high willingness to pay, but the disappointing part is their willingness to go and get the IMF deal,” Kettle said. “That’s the next piece people want to see.”

–With assistance from Eric Martin and Stephanie Lai.

(Updates fourth paragraph with bond action. Previous version corrected amount in Argentina’s IMF program.)

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