A mixed month for US Treasuries

Between May 26 and June 24, the US Treasury yield curve moved in two directions, according to the report. Yields on maturities between two and five years rose by an average of 6 basis points, while the 20- and 30-year segments fell by an average of 16 basis points. The research team tied the move to a communiqué indicating that the US and Iran had reached a memorandum of agreement during the final week of the period, aimed at extending the current ceasefire. Oil prices swung on mixed headlines through the period, and markets also took in inflation data that landed in line with the analyst consensus. In the US labor market, the report noted a stable unemployment rate alongside a significant increase in job openings.

Against that backdrop, the Federal Open Market Committee voted unanimously to hold the federal funds rate in the 3.50% to 3.75% range, a decision the bank flagged as the first without dissent in the past year and consistent with the Federal Reserve‘s prudent stance. The accompanying projections revised the 2026 growth outlook lower and the 2028 outlook higher; the unemployment forecast was cut only for 2026, while the inflation view was revised upward.

Cross-border demand for US debt strengthened. The US Treasury reported that foreign investors made net purchases of long-term bonds of $50.5 billion USD in April, the highest figure since November 2025. Private investors accounted for $30.8 billion USD of net buying in long-term Treasuries, a moderation from the pace seen in March. By geography, the net purchases concentrated in the United Kingdom and Japan, at $26 billion USD and $14.7 billion USD respectively, while investors domiciled in Canada were the largest net sellers as the country’s foreign reserves fell by $42.3 billion USD, followed by Norway and Korea.

Across emerging markets, 10-year sovereign yields moved unevenly over the month as investors responded to country-specific factors. Brazil led the increases at 46 basis points, followed by Indonesia at 43, Vietnam at 13 and Romania at 6, while Chile, Peru, India, Poland and the Czech Republic recorded declines. The report highlighted a 134-basis-point drop in Colombia, which it attributed to the market’s reaction to the first- and second-round presidential results that left Abelardo de la Espriella as president-elect for the 2026–2030 term.

The TES curve gains across the board

At home, the fixed-rate TES curve — Colombia’s peso-denominated treasury bonds — appreciated along its entire structure. Between May 22 and June 23 the curve gained an average of 188 basis points as yields fell across every segment: the short end (one to four years) by 172 basis points, the middle (five to nine years) by 218, and the long end (more than 10 years) by 169. The report attributed the move on the external side to the evolution of the Middle East conflict and the expectation of de-escalation agreements, and to the Fed’s decision to hold rates, which reinforced a cautious tone. Locally, it said the rally responded mainly to the first-round presidential result and held through the following three weeks, producing a stronger appetite for local debt.

An optimistic fiscal frame the bank questions

The report said the fiscal deficit would narrow in 2026 according to the figures in the Marco Fiscal de Mediano Plazo (Medium-Term Fiscal Framework). After its most recent update, the bank wrote, the National Government presented an optimistic outlook that does not fully incorporate the fiscal fragilities for 2026. The framework projects a deficit of 5.3% of GDP and a primary deficit improving to 2.1% of GDP. The research team countered that, while debt-management operations have improved the structure of debt service, they have been insufficient to halt the structural growth of interest payments, which would reach 3.9% of GDP in 2027 and remain above 4% in the following years. It added that debt reduction could be constrained by new financing needs in a low-liquidity environment, and that the framework itself acknowledges the need for an additional revenue adjustment of close to 1.6% of GDP to stabilize the debt.

The bank’s own outlook is more cautious than the government’s headline number. In its factor-by-factor view of the coming month, the research team described the fiscal panorama as a continuing source of concern and said the projected 2026 adjustment looks demanding, with revenue and spending pressures pointing to a deficit closer to 6.5% of GDP. Colombia lost a notch of its sovereign credit rating earlier this year, when S&P Global Ratings cut the country to BB- on fiscal concerns.

On budget execution, the report said the Presupuesto General de la Nación (General Budget of the Nation) had reached 46.7% of accumulated appropriations through May. Commitments under the budget totaled $259.8 trillion COP year-to-date, 5.5 percentage points above the same period of 2025. By component, investment led with 58.1% execution, followed by debt service at 50.0% and operating expenses at 43.1%. In terms of effective execution, accrued obligations through May reached $187.2 trillion COP, or 33.7% of appropriations, while payments stood at $185.7 trillion COP, or 33.4%.

Pension funds and banks lead TES buying

In May, pension fund managers (AFPs) and commercial banks led the month’s TES purchases, the report said. The total stock reached $763.6 trillion COP, an annual increase of 18.7% and a 1.9% gain over April. In the secondary market, net purchases came to $14.1 trillion COP, driven mainly by AFPs at $7.5 trillion COP, commercial banks at $5.7 trillion COP, insurance companies at $1.6 trillion COP and the Banco de la República at $1.3 trillion COP. Foreign funds were the largest net sellers, with a balance of -$4.7 trillion COP, a result the report attributed to the full cancellation during the month of a total return swap (TRS).

A negative tilt for the month ahead

Looking to the next month, the research team rated the balance of factors for the fixed-rate TES curve as negative overall, with the most negative readings at the short end. It pointed to a Federal Reserve holding a restrictive stance amid persistent inflation and a resilient labor market, and to external uncertainty tied to the Middle East and energy prices. On the domestic side, it noted that the economy grew 2.5% year-on-year in the first four months — less dynamic than initially expected after a retreat in primary activities — while public spending and private consumption should continue to support activity through the rest of the year.

The bank flagged inflation and monetary policy as the clearest pressures on local bonds. Annual inflation has stalled in its convergence toward the Banco de la República’s 2.0%–4.0% tolerance range and has begun to accelerate on high indexation and economic momentum, with gasoline-price adjustments, costlier fertilizers and an El Niño event capable of adding further pressure and putting inflation near 6.4% at year-end. With expectations rising, the policy rate stands at 11.25% and, the report said, could reach 12.00% at the June meeting and approach 12.75% in the second half of 2026 as the central bank works to anchor expectations. Set against those headwinds, the bank noted that Colombia’s sovereign risk premium fell over the month to below the Latin American average following the end of the electoral process, even as questions about the sustainability of public finances remain.

The report was prepared by the Directorate of Economic, Sector and Market Research of Grupo Cibest, led by Laura Clavijo, drawing on data from the Federal Reserve, the US Treasury, the Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público), the Banco de la República, LSEG Workspace and JP Morgan.

Two decades of fiscal data show that Colombia’s gross general government debt has moved through four distinct macroeconomic phases, ending the current cycle at a level that is materially higher than its pre-pandemic baseline. Persistent annual fiscal deficits, currency volatility, an emergency spending shock and weaker-than-projected tax revenues have combined to push the ratio of public debt to gross domestic product from the mid-30s percent range in the mid-2000s to a band of roughly 60 to 62 percent at the start of 2026, according to figures published by the Ministerio de Hacienda y Crédito Público and the Banco de la República.

The shift carries direct implications for sovereign bondholders, multinationals operating in Colombia and any investor pricing country risk in the Andean region. All three major rating agencies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings — now place Colombia in speculative-grade, or junk, territory, with consecutive downgrades through 2025 and into early 2026.

“The activation of the escape clause confirms that the deterioration observed in 2024 will not be corrected in 2025.” — Renzo Merino, sovereign analyst, Moody’s Ratings

The commodity cushion: 2006 to 2014

During the global commodity supercycle, Colombia benefited from sustained gross domestic product growth and steady government revenue. Hydrocarbon and mining receipts — channeled through Ecopetrol (NYSE: EC; BVC: ECOPETROL) and the broader extractive sector — supplied a substantial share of national tax intake. The debt-to-GDP ratio remained relatively stable during this period, generally hovering between 34 and 38 percent. Even with chronic primary deficits, nominal growth in the denominator absorbed new borrowing, masking the underlying structural imbalance that the Comité Autónomo de la Regla Fiscal (CARF) would later flag as the persistent driver of fiscal stress.

The currency and revenue shock: 2014 to 2019

The mechanics of the ratio changed sharply when Brent crude prices collapsed in late 2014. Reduced hydrocarbon royalties widened the fiscal gap just as the Colombian peso depreciated against the US dollar. Because a significant share of Colombia’s sovereign liabilities is denominated in foreign currency, the peso’s slide automatically inflated the local-currency value of outstanding external debt when measured against domestic GDP. The combined effect — wider deficits funded by new borrowing, plus a valuation effect on existing dollar-denominated obligations — pushed the ratio steadily higher through the late 2010s.

The structural revenue weakness that surfaced during this period has remained a recurring theme in subsequent fiscal assessments from Fedesarrollo and the Pontificia Universidad Javeriana Observatorio Fiscal, both of which have noted that successive tax reforms failed to fully close the gap between commitments and ordinary income.

The pandemic ceiling: 2020

The combination of emergency social spending under the Ingreso Solidario program, expanded health outlays and a sharp contraction in nominal GDP drove the ratio to a historic peak above 65 percent in 2020. The Ministerio de Hacienda reports the all-time high at 65.3 percent of GDP that year. The government activated the escape clause of the regla fiscal — Colombia’s fiscal rule, codified in Law 1473 of 2011 and modified by Law 2155 of 2021 — to accommodate the spending response, suspending the rule for 2020 and 2021.

That episode also triggered the first sovereign downgrade cycle: S&P Global Ratings cut Colombia’s long-term foreign currency rating to BB+ from BBB- in May 2021 after the administration of then-president Iván Duque withdrew a tax reform bill following street protests, costing the country its investment-grade status with that agency.

The new baseline: 2023 to 2026

Strong post-pandemic nominal growth briefly pulled the debt ratio down toward 57 percent in 2023. The decline did not hold. Structural spending pressures, elevated international interest rates and tax collections below budgeted projections pushed the ratio back up, establishing a new operating band around 60 to 62 percent of GDP. The Ministerio de Hacienda reported government debt to GDP at 61.3 percent for 2024.

The administration of President Gustavo Petro and Finance Minister Germán Ávila Plazas activated the regla fiscal escape clause for a second time in June 2025, with the Consejo Superior de Política Fiscal (Confis) approving a three-year suspension covering 2025 through 2027. The decision came despite an unfavorable technical opinion from the Comité Autónomo de la Regla Fiscal, which concluded that legal conditions for activating the clause were not met outside of a national emergency. The clause had previously been invoked only during the COVID-19 pandemic.

According to the Marco Fiscal de Mediano Plazo (MFMP) presented by the Ministerio de Hacienda, net public debt to GDP is projected to rise from 53 percent in 2023 to 61.3 percent in 2025 and approximately 63 percent in 2026. The fiscal deficit for 2025 was initially projected at 7.1 percent of GDP and later revised to roughly 6.2 percent of GDP, with the administration targeting a deficit below 6 percent of GDP for 2026.

Debt service consumes a larger share of the budget

The cost of servicing this debt has reshaped the structure of the national budget. The 2026 draft budget presented by Minister Ávila totals $557 trillion COP, equivalent to roughly $134.7 billion USD, and represents 28.9 percent of GDP. Of that, debt servicing costs are projected at $102.5 trillion COP, or 5.3 percent of GDP, down from 6.2 percent of GDP in 2025.

The figures published by the Ministerio de Hacienda for domestic debt service in 2026 are higher when measured against tax intake alone: of an estimated $130 trillion COP in domestic debt service, $79 trillion COP corresponds to principal that can be rolled over through new issuances, while $51 trillion COP represents interest payments funded directly from the budget. Against projected tax revenue of approximately $300 trillion COP, that implies roughly one in every three pesos collected by the central government is allocated to interest on existing debt.

Rating agencies reprice the sovereign

The rating cycle has accelerated alongside the fiscal trajectory. Moody’s Ratings downgraded Colombia to Baa3 and subsequently into junk territory in 2025, citing the suspension of the fiscal rule. S&P Global Ratings issued a further downgrade in April 2026, its second cut in less than a year, on the same persistent deficit and debt concerns. Fitch Ratings also moved Colombia deeper into speculative grade in December 2025.

The Banco de la República reported external debt — combining public and private liabilities — at $238.7 billion USD at the close of November 2025, equivalent to 54.8 percent of GDP, an increase of $15.8 billion USD from January of the same year. The Colombian economy is currently valued at approximately $435 billion USD.

What investors are watching next

The Comité Autónomo de la Regla Fiscal has stated in its most recent reports to Congress that the 2025 primary balance target was missed by a wide margin even after the escape clause was activated, and that incoming projections for 2026 raise the bar for any return to the original fiscal rule by 2028. Business groups including Fenalco and the Consejo Gremial Nacional have publicly opposed the suspension and signaled potential legal challenges.

The 2026 financing plan disclosed by the Ministerio de Hacienda includes approximately $4.6 billion USD in global bond issuances, primarily to refinance a one-year Swiss-franc Total Return Swap operation valued at roughly $9.3 billion USD. The ministry has stated that the issuance does not constitute net new external debt. Updated debt and deficit targets are scheduled for release in the next iteration of the Plan Financiero.

For executives operating in Colombia or evaluating new investment, the baseline shift from a mid-30s to a low-60s debt-to-GDP environment alters several variables simultaneously: peso volatility tied to refinancing cycles, the trajectory of corporate tax policy as Congress weighs successive reform proposals, and the path of domestic interest rates set by the Banco de la República as it manages inflation alongside elevated sovereign funding costs. Detailed historical and forward-looking debt data is published by the Investor Relations Colombia office of the Ministerio de Hacienda.

Colombia’s General Government Debt-to-GDP Ratio (2006-2026) (image: Google)

At the heart of the debate is the government’s fiscal plan and its ability to stabilize the nation’s finances. The Autonomous Committee for the Fiscal Rule (CARF), an independent body that monitors fiscal policy, has raised red flags, suggesting the government’s projections may be overly optimistic and its proposed measures insufficient to address the underlying fiscal challenges.

A High-Wire Act: The Viability of the Fiscal Plan

The Petro administration’s fiscal plan aims to fund its social programs while maintaining a semblance of fiscal discipline. However, the viability of this plan is a subject of intense debate. The government has activated an “escape clause” in the country’s fiscal rule, a move that allows for temporary deviation from deficit targets in exceptional circumstances. The government justifies this by citing the need to address social and economic challenges, including the lingering effects of the pandemic and global economic uncertainty.

Critics, however, argue that this move, coupled with what they see as unrealistic revenue forecasts, could exacerbate the country’s fiscal woes. The MFMP predicts a deficit that will only gradually decrease over the medium term, a pace that some economists believe is too slow to ensure long-term debt sustainability.

Economic Deterioration and Macroeconomic Instability

The primary risk of the current fiscal situation is a further deterioration of Colombia’s macroeconomic stability. A high and rising debt-to-GDP ratio, which now stands at a concerning level, is a key indicator of this risk. While the exact figure fluctuates, it is in the neighborhood of 60% of GDP. This is significant because a higher debt burden can lead to increased borrowing costs, not just for the government but for the private sector as well, crowding out investment and hindering economic growth.

The fiscal situation is a major contributor to this instability. A persistent deficit signals to investors that the country’s finances are not on a sustainable path, which can lead to capital flight, a weaker currency, and higher inflation.

Proposed Measures and Their Effectiveness

Minhacienda has proposed a series of measures to address the fiscal imbalance, including a combination of spending cuts and revenue-enhancing reforms. A key pillar of the government’s plan is a proposed tax reform, which aims to increase revenue by targeting higher-income individuals and corporations.

The effectiveness of these measures remains to be seen. The success of the tax reform will depend on its final design and its passage through a politically divided congress. Moreover, the proposed spending cuts could face strong opposition, particularly in a pre-election year, and may not be sufficient to close the fiscal gap.

The Human Cost: Impact on Colombia’s Poor

The fiscal challenges have a direct impact on the lives of ordinary Colombians, particularly the most vulnerable. While the government’s social spending programs are designed to alleviate poverty, a deteriorating fiscal situation could ultimately undermine these efforts.

If the government is forced to implement more drastic austerity measures in the future, it could lead to cuts in essential public services, such as healthcare, education, and social assistance programs. Furthermore, the macroeconomic instability associated with a high deficit and debt can lead to higher inflation, which erodes the purchasing power of the poor and exacerbates inequality.

Navigating a Treacherous Path: Debt Stabilization and the Road Ahead

To stabilize its debt, Colombia needs to implement a credible and sustainable fiscal consolidation plan. This would require a combination of realistic revenue projections, prudent spending, and structural reforms to enhance economic growth. The upcoming presidential election further complicates the picture, as politically difficult decisions may be postponed.

Looking ahead, several scenarios are possible:

• Best Case: The government successfully implements its fiscal plan, the tax reform generates the expected revenue, and the economy experiences a period of strong growth, leading to a gradual reduction in the debt-to-GDP ratio.
• Most Probable: The government struggles to fully implement its plan due to political opposition and optimistic revenue assumptions. The debt-to-GDP ratio remains elevated, and the country continues to face macroeconomic headwinds.
• Worst Case: The government’s fiscal plan proves to be unviable, leading to a debt crisis, a sharp economic downturn, and a significant increase in poverty and inequality.

The coming months will be critical for Colombia’s economic future. The government’s ability to navigate the complex fiscal landscape and implement a credible consolidation plan will determine whether the country can achieve sustainable and inclusive growth or faces a period of prolonged economic instability. The performance of key state-owned enterprises, such as the oil giant Ecopetrol (NYSE: EC, BVC: ECOPETROL), will also play a crucial role in the nation’s economic fortunes. The path forward is narrow and fraught with challenges, and the stakes for the Colombian people could not be higher.

Gustavo Petro at his 2025 Labor Day rally. Photo credit: Presidencia de la República de Colombia.

The new National Development Plan, subtitled “Colombia: World Power of Life” was submitted to Congress on Monday by President Gustavo Petro and Vice President Francia Márquez, with a theme of utilizing the country’s resources towards more socially-conscious aims to protect life in general.

The new plan aligns around goals of the Petro administration, including his “total peace” initiative. “[The plan] aims to lay the foundations for the country to become a leader in the protection of life from of the construction of a new social contract that promotes the overcoming of injustices and historical exclusions, the non-repetition of the conflict, the change in our relationship with the environment and a productive transformation based on knowledge and in harmony with nature,” said Petro.

The plan has five points of foci, including changing “land use planning and development” to bias towards the protection of the environment, “Human security and social justice,” a comprehensive new climate plan, “Human rights to food,” and more interconnected planning between regional powers in the area.

According to the administration, implementation of the plan is estimated to cost around $250 billion COP over the next four years. They propose funding through a mix of public investments and investment transfers, royalties from public resources of the country, and potential international deals and cooperation administered by the Presidential Agency for International Cooperation, now headed by Eleanora Betancur, who was appointed after a stint in Medellin’s investment promotion agency, ACI Medellín.

“The total value of the expenses that are carried out for the execution of the present National Development Plan, financed with resources of the general budget of the nation, may not exceed in any case the amount of the resources available in accordance with the macroeconomic plan and the Framework Medium Term Prosecutor -MFMP- of the national government in accordance with the provisions of articles 4 and 5 of Law 1473 of 2011,” said a statement issued by the Presidency.

The majority of the proposed plan goes to human security and social justice, which is projected to take up 64% of the value of the proposed plan. Regional convergence, which will focus on “reducing social and economic gaps between households and regions in the country,” will receive 12%, while climate action-related projects are projected to consume 10% of the plan’s budget.

A focus on indigenous communities as well as the Petro administration’s peace plan is also prominently featured within the plan, with the establishment of a “Colombia in Peace” fund and other funds earmarked specifically for the peace process, which for now is focused on talks with the National Liberation Army (ELN).