Don't cry for Argentina...yet
Senior Fixed Income Strategist
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
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.