Argentina Century Bond Shows Market Will Forgive for Yield
2017 M06 19 23:00 GMT-3 Updated On 2017 M06 20 11:01 GMT-3
Argentina, a country that spent 75 years of its two-century history in default, convinced investors that its track record is no cause for concern.
The government sold $2.75 billion of bonds Monday that it may not have to pay back until the year 2117. The leap of faith comes just 14 months after Argentina issued its first international bonds since an economic collapse in 2001 that resulted in a record-setting $95 billion default and years of litigation with Wall Street hedge funds.
Investors are willing to look beyond Argentina’s debt history because low global inflation has driven real interest rates down to record lows, with debt from Germany, France and Japan at negative yields. The 7.9 percent yield on Argentina’s notes looks like a fat payday to investors who can stomach the risk, but Argentina’s junk rated securities may be too low for the pension funds and insurance companies that usually buy ultra-long debt.
“The market has a short memory,” said Victor Fu, the director of emerging-market sovereign strategy at Stifel Nicolaus & Co. “Especially given that Argentina is still a high-yielder fitting the appetite of a yield-starved market. The deal itself doesn’t worry me, although the multi-year tight EM spreads are a bit concerning.”
The longer-dated the debt, the larger the impact a single basis-point change in yield has on the price. When the market is buoyant, as it is now, longer maturity notes provide the best returns, but when things go sour the losses can be huge. The only other century bonds in the Bloomberg Barclays EM USD index are Mexico’s, which are rated BBB+, seven steps above Argentina. Ireland and the U.K. have also sold debt maturing in 100 years. That may be mitigated in this case because Argentina is selling the debt at 90 cents on the dollar.
The sale weighed on the country’s existing dollar debt. The extra yield investors demand to hold Argentine bonds instead of Treasuries rose eight basis points to 419 basis points as of 9:58 a.m. in New York, the highest in a month. It climbed five basis points on Monday.
Argentina’s bond sale will help the government bridge a budget deficit, but it’s also a potent symbol for President Mauricio Macri, who took office in 2015 promising a host of economic changes that would better position the country for growth. He has floated the currency, corrected economic data that had been manipulated, and settled with holdout bond investors to win access to overseas capital markets.
The bond sale comes a day before index provider MSCI is due to announce its decision on whether to raise the country’s stocks to emerging-market status from frontier, potentially opening up Argentine equities to a vast new investor base.
Macri needs the support. While Argentina is no longer in recession, inflation remains stubbornly high, partly because Macri has removed subsidies on fuel and energy, and growth is sluggish. One-third of the population lives below the poverty level and foreign direct investment has been slow to materialize as investors wait to see whether former President Cristina Fernandez de Kirchner wins a senate seat in October, impeding the progress of Macri’s coalition, known as Cambiemos.
Despite those struggles his government is taking the right steps, Phillip Blackwood, a managing partner at EM Quest Ltd., which advises Sydbank A/S on $2.5 billion of emerging-market assets and put in orders for the bonds.
“The market will always reward good policy-makers,” he said. “The risk, of course, is a reversion to Peronism and then the rating will stagnate rather than continue its expected upward trajectory under Cambiemos.”
Sebastian Boyd & Ben Bartenstein