Colombia Eyes Shorter-Term Debt as Yields Rise After Unrest

Colombia may start relying more heavily on shorter-term debt sales to cover its budget shortfalls, seeking to drive down interest costs after a failed tax-reform push triggered social unrest and sent yields higher. Yields on longer-term bonds fell.

Public Credit Director Cesar Arias, a Finance Ministry official who is in charge of the government’s borrowing, said in an interview that he will begin to discuss with investors whether to scale back the maturities on some of the bonds it sells at auction.

“We plan to continue with what we have in terms of the amount,” he said. “What we are beginning to discuss with the market is the optimal duration, given the steepness of the curve and overall investor appetite. My sense is that duration will probably be shorter.”

The potential shift comes after long-term yields have jumped, with President Ivan Duque in May dropping his tax-hike plan after it set off street protests and forced the resignation of his finance minister. S&P Global Ratings cut the nation’s foreign-currency debt rating to junk last month as the government contends with mounting deficits brought on by the pandemic.

Colombia Eyes Shorter-Term Debt as Yields Rise After Unrest

Yields on the country’s peso bonds due in 2050 fell 17 basis points, the most in three weeks, to 8.07%. The potential maturity shift could “reduce supply pressures” in the long end of the curve, said Camilo Diaz, head strategist at the Itau Comisionista de Bolsa brokerage in Bogota. Yet it would also lead to a higher concentration of maturities in the short end, which is concerning, he said.

The recent bond-market rout has saddled investors in Colombia’s peso-denominated debt with a loss of 11% this year in dollar terms, according to a Bloomberg Barclays index. That stands in contrast with an average gain of 0.2% for its emerging-market peers.

But Arias said foreign investors continued to be net buyers of Colombia’s peso bonds, known as TES, in May. He said foreigners bought 4.1 trillion pesos ($1.1 billion) of the securities last month, the same amount as in April. Foreigners own about a quarter of the bonds.

Resilient to Shocks

Every other week, the Andean nation currently offers fixed-rate bonds due in 2027, 2036 and 2050, and inflation-linked debt maturing 2029, 2037 and 2049.

“The TES market has shown to be resilient to the shocks,” said Arias. “Many forecast foreign capital outflows, and what data shows is the contrary.”

After the withdrawal of the tax bill, new Finance Minister Jose Manuel Restrepo is focusing on seeking a wide consensus before sending a new proposal to lawmakers. The new bill will likely include the elimination of the 5% tax on foreign holders of peso bonds, Arias said.

Colombia will offer its first green bonds in the local market as soon as July, according to Arias. The ministry will issue as much as 2 trillion pesos of notes that will fund projects including renewable energy generation and to fight deforestation.

The offering will either be carried out through auctions or through a syndication, Arias said. Starting in mid-June the ministry will start “marketing” the bonds to determine the timing and bond maturity, he said.

Bond ETF

The finance ministry has also been working on the planned launch of an exchange-traded fund that Arias said could expand the buyer base for its peso bonds by attracting individual investors.

The kick off is planned for the first half of 2022, when it would begin trading on the country’s stock exchange, according to Arias. It may later also trade in the platform known as MILA that integrates the bourses of Chile, Colombia, Mexico, and Peru.

After selling a net $1.6 billion of bonds in the overseas market in January and $3 billion in April, Colombia has completed 90% of its planned external bond offerings this year, said Arias. But he added that he expects no difficulties in tapping the market once again for the remaining amount “if needed.”

©2021 Bloomberg L.P.

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