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More difficult than the Tour de France

Colombia has much to celebrate this week. Egan Bernal has honored his country by delivering Colombia its first Tour de France victory. For those that follow the world of cycling, you know how grueling the Tour de France course can be. Long uphill climbs through the alps can only be accomplished by the best cyclists in the world. Egan has proved that Colombians can compete and come out on top.

While Egan has spent his whole career preparing for this moment, another team of athletes in Colombia has been training around the clock to make Colombia #1. That team is the economic team spearheading President Duque’s “Orange Economy”. 
Left with mounting debt and corruption from the prior administration its task has been like trying to ride uphill in the alps with two flat tires. Yet the econ team has done it. Moody’s rating services came out this month saying they expect a moderate pick up in the economy after two years of weakness and reaffirmed their outlook of stable vs negative. Markets and investors have taken notice. Legendary bond manager PIMCO is increasing their Colombian debt holdings as are JP Morgan and other large institutional buyers.

“We have pivoted to having a more positive outlook on Colombian local bonds following the improvement in the macro framework which has been outlined by the ministry of finance.” – Pramol Dhawan, Head of Emerging Markets, PIMCO

The result of increased capital flow into Colombia is that Colombia’s borrowing costs have plummeted 80-100 bps in 12 months. Now before we do a victory lap it should be noted that much of the drop in borrowing costs is being driven by negative rates in Europe and Japan. Investors are hungry for yield and as Colombia appears less risky its 10yr yields near 6% look highly attractive.

Chart: Colombian Sovereign Yield Curve 12 months ago vs today Source: Bloomberg, Dorr Asset Management.

As would be expected, Colombia’s drop in borrowing costs has also dropped the costs of insuring against a government default. 10-year credit default swaps have also dropped by almost 40bps in the last 12 months. 

Chart: Credit Default Swaps on Colombia 12 months ago vs today Source: Bloomberg, Dorr Asset Management.

Colombia still has a long way to go as it faces global headwinds from oil prices, trade wars and global asset bubbles that are about to pop, but if it keeps focused on the road ahead it will emerge victoriously.

To all our friends and clients in Colombia, we are cheering for you. See you at the top!