Argentine century bond shows emerging ebullience Investors back bond issue in spite of history of default in country
The history of markets is littered with vivid anecdotes — from stock-tipping shoeshine boys to trading rotten sardines — that signal when optimism morphed into ebullience, presaging a crash. In time, this week’s Argentine century bond sale might just enter the same pantheon.
Argentina’s turnround is genuine and exciting. But president Mauricio Macri has been in power for less than two years and many hard reforms remain to be done. And this is a country that goes through debt defaults like its footballers score goals.
Indeed, Argentina has been in default on at least some of its debts for all but six years of the past two decades, but investors eagerly let bygones be bygones and lent the country $2.75bn for the next 100 years at a yield of just under 8 per cent. The average 30-year borrowing cost of the US has averaged just under 7 per cent since the mid-1970s.
This underscores the ebullient mood among investors in emerging markets, which have bounced back strongly from a rout triggered by the 2013 “taper tantrum” when US Treasury yields spiked after the Fed signalled the wind down of bond purchases and the initial fright caused by the election of Donald Trump last year.
The recovery has been driven by “yield refugees” fleeing the desultory returns offered by developed bond markets, and encouraged by an improvement in emerging market fundamentals.
But on closer inspection the rally has some dark smudges. A hefty chunk of the inflows has come through exchange traded funds. The inflows into emerging market bond ETFs have hit $12.6bn this year, according to EPFR, smashing past the record $10.9bn taken in 2016. That is almost half as much as EM fixed income mutual funds have taken.
EMB, the biggest EM bond ETF, and its European counterpart have more than doubled in size since the start of 2016 to $20.6bn in total. Local currency EM bond ETFs are also growing at a brisk pace.
Much of this money is likely tactical, and would be withdrawn swiftly should emerging markets be hit by a shock. While ETFs are still only a tiny part of the overall market, EM bonds are often horrifically hard to trade, and supposedly liquid ETFs hit by a wave of redemptions could easily cause dislocations.