Argentina has been able to refinance 26bn of the peso-denominated short-term securities known as Lebacs, at 40% for the 26-day issue and at 38% for 154-day ones, although the country is battling a currency crisis. The Argentinian peso has fallen approximately 20% since the end of April as investors realised that the country's economy is weak and vulnerable to external factors such as US dollar strength and the Trump administration’s unfavourable trade policies. President Mauricio Macri’s gradualist approach to undo the populist policies of his predecessor has not proven effective in halting galloping inflation and a soaring current account deficit, which at the moment amounts to 5% of GDP.
Bonds have suffered outflows in the past few days, partly because investors fled to safer assets, and partly because there is no reason to keep EM investments when interest rates in the US are rising, making US corporates and even Treasuries look interesting. Just to give you an example, the US 2-yr Treasury yield has hit 2.58% which is the highest level we have seen since 2008. Only one year ago the yield on these 2-yr US notes was below 1% and although it is true that Treasuries may fall further, current levels give investors the opportunity to invest in a short maturity Treasury paying very close to the yield of the 10-yr benchmark.
This implies that the sell-off we are witnessing in Argentina may spill into other countries which in the past few years have also amassed large amounts of US dollar debt, taking advantage of the plight of yield-starved international investors.
In the meantime, Argentina is said not to be looking to issue international debt until next year, a move that would reduce the US dollar bond supply that could support sovereign prices in the medium term. At the same time, Macri’s plan to turn to the IMF for a bailout may play a supportive role for Argentinian sovereign debt as if the bailout were to be granted, it would put investors at ease because the country would then have sufficient reserves to meet debt maturities.
Some investors are already stepping forward and filling their pockets with cheaper Argentinian sovereigns even though they are conscious that nobody really knows where they will be tomorrow. The real question at this point is, how much pressure needs to be applied in order to scare off investors?
Figure 1: USDARS and Argentina centenary bond price in blue. Source: Bloomberg