Low interest rates in the international market have favored Costa Rican sovereign debt bonds which are yielding better dividends.
Friday, July 22, 2016
Higher rates paid out by Costa Rican bonds with their associated risk level, coupled with an international context of low interest rates, has led to increased demand for foreign debt bonds, which "... have appreciated between 14% and 30%" so far this year.
Nacion.com reports that "...The external debt titles issued by the Government of Costa Rica, for a term of 10 years (expiring in 2025), had, last Wednesday, a yield of 4.94%, 339 basis points above the title of 10 year US Treasury bonds."
Pedro Aguilar, head of Economic Analysis at Aldesa, said that "... the increased demand for dollar bonds is due to reasons related to both local and external factors. He added that Costa Ricans Eurobonds have become a "haven" for investors, as the Treasury of the Federal Reserve of the United States (the Fed) pays low interest rates."
The rise of interest rates in US is one of the reasons behind the lower demand for Costa Rican debt bonds, which are perceived as riskier because they are not investment grade.
When US interest rates began to fall, international investors sought riskier options and performances, such as external debt bonds rated below investment grade in countries such as Costa Rica.
The difference in the yield on 30-year bonds relative to US Treasuries of the same period went from 3.33% in April to 3.85% up to December 4th.
The decision by the Executive to increase public spending in 2015 and continue to increase the fiscal deficit in an international environment which is a less favorable than it was in previous years is one of the reasons that explains the higher risk now being perceived by international investors regarding Costa Rican foreign debt bonds.
The increased perception of risk generated by the fiscal deficit has forced the government to offer a higher rate than the one agreed a year ago for the same issuance.
The Government of Costa Rica issued $1 billion in debt on the international market with a 30 year term and an interest rate of 7%, higher than the rate of 5.63% set a year ago in an issue also for $1 billion over 30 years.
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