Bloomberg — There was a time last year when investors bailed on Colombian debt at a frenetic pace. Spooked by the radical reform agenda of leftist President Gustavo Petro, the stampede was so intense that they briefly pushed some bonds to levels that suggest they were bracing for a possible default.
Nine months later, there is no hotter bond market in all of emerging markets. Peso-denominated government notes have posted a 23% return in dollars this year, the biggest local-market rally in a Bloomberg index of developing nations.
It’s a turnaround that has rewarded a handful of Wall Street’s biggest names, including BlackRock Inc., Franklin Templeton, and T. Rowe Price Group Inc.. Between them, they’ve scooped up $1 billion of the debt this year.
It also highlights how much Petro — who vowed to usher in a wave of changes that would lift millions out of poverty — has been neutralized just a year into office. The former guerrilla fighter-turned-politician has been kept in check by Congress and institutions, keeping the historically conservative economic model intact.
“Both the macroeconomic and political risks were overestimated,” Barclays economist Alejandro Arreaza said. “That is why we have had such a strong correction in 2023.”
Investors moved into the market for government notes, known as TES, as yields rose to record levels — topping 15% in October for bonds due in 2050 — as a result of the most aggressive interest rate hiking cycle in the central bank’s history. That helped the peso gain 22%, the best performance among all currencies tracked by Bloomberg.
“The Colombian peso has outperformed as a result of the attractive carry associated with the currency,” said Brendan McKenna, an economist and foreign currency strategist at Wells Fargo Securities LLC. “While Colombia has had one of the more acute inflation challenges in Latin America and emerging markets, the central bank responded with aggressive rate hikes.”
In the first half, funds managed by BlackRock purchased a net $325 million of TES notes, making them the largest buyers of the securities. Schroders Plc. and Barings were also buyers. Bloomberg compiles the numbers from data released monthly by the Comptroller General’s Office.
Representatives for the firms declined to comment.
BlackRock strategists led by Wei Li said in a Monday note that the world’s largest money manager is overweight on local-currency debt in emerging markets and that yields are likely to remain attractive.
Even after the rally, TES notes due in 2033 and 2050 are yielding about 6 percentage points more than comparable US Treasuries.
The assets have rallied in tandem with the decline in political risk, said Ward Brown, a money manager at MFS Investment Management, which holds short-dated TES notes. “It was a bounce back from an oversold position,” Brown said.
Petro’s proposals, which included overhauling the pension and health systems and the labor market, have stalled in congress as his administration has been hit by a series of scandals, hurting his political coalition. And fears over the direction his new finance chief — an ally who was appointed in April after Petro dismissed several cabinet members — would take the country have largely eased.
The cost of insuring against default through instruments known as credit default swaps has fallen to its lowest level in more than a year.
Still, some investors say the rally has run its course and that there’s plenty of room for political risk to return as Petro has three years left in office.
What’s more, government spending is rising, a warning sign for investors about the country’s fiscal health. Last week, an independent committee warned the spending and uncertainty over revenue may lead to the government to break its so-called fiscal rule, which aims to keep its deficit in check.
The country has set a goal of bringing its debt-to-gross domestic product ratio down to 55% by 2034. But Capital Economics forecasts that number will rise to 65% this year and remain around that level over the next few years.
The risks have chased away some investors, including the Canadian pension fund Caisse de dépôt et placement du Québec and Japan’s Government Pension Investment Fund.
Foreign investors own roughly a fourth of Colombia’s $117 billion TES market.
At LM Capital Group LLC, money manager Vikrant Khadilkar and credit analyst Pablo Barriers said they need more evidence showing that Petro’s reforms won’t get pushed through to consider the assets attractive.
“We do see that the trend from the idiosyncratic standpoint has been positive,” said Khadilkar. “The new finance minister has done a decent job of appeasing investor concerns, but we don’t think that merits the move that you have seen.”
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