Pimco Is Dominating the Market for Argentina’s Bond That Pays 68%
The securities, originally issued in June 2017 and maturing in 2020, pay a floating coupon tied to the country’s benchmark interest rate, which stands at just under 68%. Pimco has increased its position in the securities by about two-thirds this year, and now owns almost 40% of the total 104 billion pesos ($2.4 billion) issue, according to the bond-fund manager’s most recent regulatory filings.
While nominal returns in recent quarters have been huge -- the notes reset at a coupon rate of 68.5% in March -- gains had been eroded somewhat by a depreciating peso. Not so this time around. The currency has weakened less than 1% versus the U.S. dollar since the end of March, a relief for investors in Argentine assets who convert their proceeds into greenbacks. Pimco’s profits would depend significantly on the extent to which it hedged its foreign-exchange exposure.
The asset manager declined to comment on its Argentine holdings.
The bond’s coupon is set to adjust again June 21. Argentina reopened the auction Thursday in part to allow investors to roll over their interest payments and avoid outflows that could fuel currency volatility. The country sold 33 billion pesos of the security -- known locally as Bopom -- and will hold a second round exclusively for market-makers from 10 a.m. to 1 p.m. on June 18.
At these levels the securities “are one of our top picks,” said Juan Manuel Pazos, chief economist at Buenos Aires-based broker TPCG Valores SA. Even if Argentina’s central bank takes steps to allow its key benchmark to fall, “I expect a gradual rate decrease,” he said, adding that if volatility were to pick up, officials would have to quickly shift policy.
The $125 billion Pimco Income Fund, co-managed by Dan Ivascyn, holds more than half of the investment firm’s allotment of the securities. Still, all Argentine debt accounts for less than 2% of the fund’s total assets, according to data compiled by Bloomberg. The fund has outperformed 99% of its peers over the past five years but has lagged more recently.
When Argentina issued the bond two years ago, the country’s benchmark rate was a more modest 26% amid expectations President Mauricio Macri would be able to revive an economy that stagnated under his populist predecessor. That optimism was quickly dashed in 2018 as the nation fell into recession, the peso dropped the most in the world and the country was forced to seek an emergency line of credit from the International Monetary Fund.
Amid resurgent inflation, policy makers boosted rates to 40% in May 2018, then 60% in August and over 70% by October while changing the benchmark used as the key reference for the nation’s policy rate.
Still, a recent survey by the Argentine central bank shows economists expect interest rates to end the year at about 55%. Even more worrisome for investors may be the fact that Macri is facing stiff competition in his bid to secure a second presidential term in October from less market friendly tickets.
By Pablo Rosendo Gonzalez and Patrick Gillespie
With assistance by John Gittelsohn, Carolina Millan, and Ignacio Olivera Doll