Colombia's Long Bonds: A Contrarian Bet Amid Fiscal Turmoil and Policy Shifts

The Colombian peso has been a poster child for emerging market volatility in 2025, with the central bank’s policy rate hovering near 15% to combat stubbornly high inflation. Yet beneath the surface of fiscal headlines lies an asymmetric opportunity in Colombia’s long-dated TES bonds—government securities with maturities exceeding 20 years. Despite near-term risks from fiscal slippage and political gridlock, these instruments now offer some of the highest real yields in the EM universe, pricing in worst-case scenarios while positioning investors to capitalize on stabilization under President Petro’s reforms.

The Fiscal Crossroads: Risk Already Priced In

Colombia’s fiscal deficit widened to 6.7% of GDP in 2024, with debt set to hit 62% by 2026—a trajectory that has spooked foreign investors. Capital outflows from TES bonds reached $4.2 billion in 2024, pushing yields to decade highs. But this exodus has created a compelling entry point: . With real yields now exceeding 8%—a full 300 basis points above Brazil’s long bonds—the market has overcorrected. Key catalysts for stabilization are already in motion:

1. IMF Backstop: The $8.1 billion flexible credit line secured in April 2024 has bolstered reserves to $61.9 billion, shielding Colombia from external shocks.
2. Policy Normalization: The central bank’s hawkish stance has anchored inflation expectations, even as GDP growth inches toward 3% in 2025.
3. Political Catalysts: While the Senate’s May 1 rejection of Petro’s labor reform referendum created short-term noise, the backlash has unified his base. A “no” vote in the upcoming referendum would crystallize the opposition’s obstructionism, creating a narrative ripe for fiscal compromise ahead of 2026 elections.

Why the Contrarian Play Works

Long-dated TES bonds (e.g., the 2050 issue yielding 11.5%) offer three distinct advantages in today’s market:

1. Asymmetric Risk/Reward

The downside is capped by Colombia’s strong external balance sheet and the IMF’s conditional support. Meanwhile, the upside is asymmetric:
- A mere 50 basis point drop in yields would generate a 20%+ price gain given the bonds’ long duration.
- A successful fiscal compact with Congress or a surprise pickup in tax revenues could erase deficit projections faster than consensus expects.

2. Hedge Against Regional Volatility

While Argentina’s default risks and Brazil’s political paralysis dominate headlines, Colombia’s bonds offer a defensive play within the region. The peso’s 10% depreciation year-to-date has already discounted much of the external risk, while the TES curve’s steepness (see ) ensures investors are compensated for duration risk.

3. A Play on Fiscal Stabilization

Petro’s administration, despite legislative hurdles, has delivered on structural reforms:
- The education and pension reforms enacted in 2024-2025 directly address inequality, a key driver of social unrest.
- The stalled labor referendum may force compromise on a trimmed version of reforms, creating a fiscal “Plan B” that avoids deeper deficit risks.

Technical Setup: Oversold and Undervalued

The TES bond market’s extreme positioning presents a rare contrarian signal:
- Foreign ownership of long-dated TES bonds has fallen to 2015 levels, with 40% of 30-year bonds now held by domestic institutions.
- Option-adjusted spreads over U.S. Treasuries are 600 basis points—400 basis points wider than Colombia’s 53% debt-to-GDP ratio justifies historically.

Political Risks Priced In?

Critics cite Petro’s legislative failures and the ELN’s resumption of violence as risks. But these factors are already reflected in prices:
- The recent Catatumbo clashes caused a 20 basis point spike in yields—yet the peso stabilized within days, showing market resilience.
- Petro’s 34% approval rating may pressure his agenda but also creates incentives to deliver fiscal credibility before elections.

Positioning Strategy

Investors should:
1. Ladder maturities between 2028-2030, capturing the steepest part of the yield curve while avoiding excessive duration risk.
2. Pair with a short position in USD/COP volatility, using options to hedge against near-term political shocks.
3. Target a 10-15% allocation within EM fixed income, treating it as a high-yield anchor amid regional uncertainty.

Conclusion: The Clock Is Ticking

Colombia’s long bonds are the ultimate contrarian trade in an oversold emerging market landscape. With real yields at crisis levels, an IMF safety net in place, and Petro’s reforms creating a “bottom fishing” environment, the setup is textbook. The risks are known, the pain is priced—and the rewards of a stabilization scenario are vast. For yield-starved investors, this is the time to act.

The opportunity won’t last forever. As fiscal compromises materialize and foreign capital returns, these bonds will reprice—not just for yield, but as a pillar of Colombia’s economic renaissance.