El Salvador bonds plunge as investors eye Bitcoin usage, IMF talks

S&P Global said there are risks associated with the introduction of Bitcoin As a parallel legal tender to the US dollar, “its potential benefits appear to outweigh” and there are “immediate negative impacts on creditworthiness.”

S&P also said that the use of Bitcoin threatens a potential agreement between El Salvador and the IMF.

Treasury spreads over comparable U.S. Treasury bonds rose to 986 basis points on Thursday, surpassing the previous record high set in May 2020.

Bond prices are near last October's lows before climbing to record highs in mid-April.

“These new price lows could encourage capitulation among core longs that are forced to reassess their overweight positions without an IMF anchor,” Siobhan Morden, head of Latin America bond strategy at Amherst Pierpont Securities, said in a note to clients.

“The economic agenda remains subordinate to the political agenda, with no clear fiscal financing framework, no apparent commitment to fiscal discipline and a political agenda that slows investment and growth.”

Thousands of Salvadorans demonstrated on Wednesday against an alleged seizure of power by President Nayib Bukele, who is otherwise popular with the public. Bitcoin policy was also a target of the protest, and an ATM where the cryptocurrency can be exchanged for dollars was vandalized.

The rapid dismissal of judges from the Supreme Court's Constitutional Committee in May and the recent court ruling that the president can serve two consecutive terms, which opened the door for Bukele to run for re-election in 2024, have strained his relationship with the United States.

U.S. votes carry the greatest weight in any loan decision at the IMF.

The potential for an IMF program for El Salvador is "under discussion," fund spokesman Gerry Rice said in a news conference on Thursday, adding that anti-corruption measures and fiscal responsibility are high on the agenda.

The fund did not immediately respond to a request for comment on S&P's statement about the risks of a potential deal.

You can find an overview of all of today's economic events in ourEconomic calendar.

(Reporting by Rodrigo Campos; Additional reporting by Nelson Rentería and Marc Jones; Editing by Paul Simao)