It's Time For A Little Chat About El Salvadorian Bond Yields

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Look, I’ll be the first one to tell you that you can’t really read too much into financial asset prices these days.

The bottom line is that nearly a decade of central bank profligacy saw the “Big 3”, between them, dump some $15 trillion at the top of the quality ladder and when you do that, you send everyone scrambling down that ladder in search of yield. Along the way, everything gets priced to perfection. That’s just how it works and indeed, what critics of the “central banks have distorted markets” refrain consistently fail to acknowledge is that that’s precisely how it was designed to work. The hilarious thing about the whole “that’s a conspiracy theory” narrative is that if it’s a “secret”, it’s the worst kept secret in the history of finance because policymakers have been explaining how it works in public and at each and every post-meeting presser for years on end.

Anyway, the point is that you can’t really look out across bond markets and credit markets and draw any conclusions about what yields and spreads are saying because the reality is that they aren’t “saying” anything other than this: “don’t trust us, this isn’t a reflection of reality”.

If you needed stone, cold proof of that, BofAML provided it back in August with a truly amusing note documenting the extent to which CSPP had helped drive yields on € HY below those of USTs. And there were all sorts of other incredible visuals and factoids in there. Here’s a refresher in case you missed it (again, these are from August, but the point is what they say about the market):

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Why bring this up? Well, because there’s a “shithole” connection and no, it is not yet time to stop it with the “shithole” jokes. We’re a long way from exhausting our capacity to squeeze that boondoggle for all the comedic value it’s worth and besides, the U.S. now faces a government shutdown in large part thanks to that same boondoggle, so even if you’re ready to move on, lawmakers most assuredly are not.

You’ll recall that El Salvador made it onto Trump’s vaunted “shithole” list along with the entire continent of Africa and Haiti. Foreign Minister Hugo Martinez was not amused. In fact, he sent a formal protest letter to the U.S. government.

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Ok, so the punchline here comes courtesy of Bloomberg’s Natasha Doff who on Wednesday wrote the following:

Whether or not U.S. President Donald Trump made a profane assessment of El Salvador, in the bond market the country is in more demand than ever.

In fact, the central American nation’s 2019 dollar debt has rallied so much in the past six months that at one point in January it yielded less than 4 percent. That’s the rate you would have got on 10-year U.S. Treasuries just under a decade ago.

Here’s the chart on that:

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Natasha calls that some “expensive junk” (El Salvador is seven levels below IG), but thanks to not being subject to the same editorial rigor, I’m free to tell it like it is: “that’s some expensive shithole”.

Have a look at 10Y yields in the U.S. versus the yield on some 2027s El Salvador issued back in 2014:

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As you can see, the spread there has come in meaningfully, further underscoring the joke.

Of course what’s not a joke is the plight of El Salvador itself.

“With more than 60 murders per 100,000 inhabitants in 2017, El Salvador has one of the highest murder rates in the world,” Héctor Lindo-Fuentes, a Salvadoran historian at Fordham University told The New York Times earlier this month, for a piece documenting the fallout from the Trump administration’s decision to end the protected status of 200,000 Salvadoran immigrants.

“This extraordinary violence has a significant made-in-the-U.S. component,” Lindo-Fuentes went on to note, suggesting that if Trump’s “profane assessment” (to quote Doff) of El Salvador is any semblance of accurate, the U.S. shoulders some of the blame. You can read the entire NYT piece for more on that.

Whatever the case, to the extent the you can divine anything about country-specific risk from yields in an environment where risk assets off all stripes are bid across the board, El Salvador is becoming less “shitty” over time - even as a deficit-funded tax break for the wealthy imperils America’s own fiscal position.

There’s some irony for you.

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