Argentina's 100-Year Bonds Plunge
Things went from bad to worse for Argentine bondholders this week as the effects of a global market rout throttled demand for a risky trade that had become a Wall Street favorite.
The pain has been particularly acute for investors of the country’s 100-year bonds. Their price dropped to 91 cents on the dollar from 103 cents at the end of last year as traders unnerved by the prospect of rising U.S. interest rates dumped securities with long maturities. Overall, the country’s dollar-denominated bonds lost 2.1 percent over the first four days of the week, leaving them down more than 6 percent on the year, the worst performance in emerging markets, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
Argentina is getting hit from several sides. The selloff in U.S. equities is seeping into other markets globally as investors pull back from riskier assets. At the same time, the peso has fallen to a record low against the dollar amid growing concern that the central bank is under pressure from President Mauricio Macri’s administration to pull back on its fight against inflation.
That’s raising hairs in South America’s second-largest economy, where the government needs to continue selling debt to finance its primary fiscal deficit. Macri has authorized the issue of as much as $15 billion in foreign currency bonds in 2018. Finance Minister Luis Caputo has said financing needs will be $30 billion for this year, of which about 40 percent will be issued in foreign currencies.
The 100-year bond has sold off with other longer-date debt securities as it’s getting caught up in investor concerns that rising interest rates will drag down economic growth.
“We’re recommending to our clients that they sell long-dated bonds and buy shorter-term ones,” said Fernando Baer, a strategist at Buenos Aires-based Quantum Finanzas, a consulting firm led by former Finance Secretary Daniel Marx. “The international and local risk remains, with a high deficit and a need for financing that will be more expensive onwards.”
Not everyone’s so bearish. Alvaro Vivanco, head of Latin America fixed-income strategy at BBVA in New York, said in a note this week that the underperformance of Argentine bonds relative to other high-yielding debt means they should be shielded from any additional volatility in markets. And Michael Roche, a fixed-income strategist at Seaport Global Holdings LLC, sees it as a natural reaction to U.S. Treasuries and points to the country’s positive credit momentum.
“Argentina’s 100-year bond is very attractive, not only because of its yield but also because the country is enjoying credit upgrades,” he said. “But it’s too soon to recommend a purchase. Investors will wait further to evaluate when selling is exhausted.”
Credit raters have lifted Argentina as the government performed a spectacular turnaround after ending its decade-long dispute with creditors over its 2001 default, culminating with the century-bond issue. However, since December, investors have had to contend with an unpredictable central bank led by President Federico Sturzenegger after the government changed inflation goals, the world’s worst currency, and an overall fiscal deficit that remains above 6 percent.
A Finance Ministry official didn’t reply to a request for comment.