Pimco Bet on Argentine Bond Paying 75% Rate Hit by Peso Rout

(Bloomberg) -- Pacific Investment Management Co.’s decision to buy up almost a third of the world’s top-paying government bond hit a bump this week as the Argentine peso collapsed.

The debt maturing next June has fallen to a record low of 71 cents on the dollar from 104 cents last Friday. The notes pay a floating coupon tied to the benchmark interest rate, which stood at an all-time high of 75% on Tuesday. Yet the peso’s tumble after a landslide defeat in the primaries for President Mauricio Macri outweighed any yield on the debt.

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Pimco holds about 30% of the 142 billion pesos ($2.4 billion) of 2020 bonds, according to data compiled by Bloomberg. The investment firm had boosted its exposure earlier in the year before Argentina re-opened the bond sale.

Pimco has diversified its holdings “with more downside protection in an extreme market event” and “avoided larger exposures with greater losses that have impacted other major investors,” spokesman Michael Reid said.

Nominal returns for the notes have been huge in recent quarters, yet the peso’s status as a global laggard curbed real gains. The currency has weakened a world-leading 37% this year, and many analysts say it has much further to fall.

Pimco’s profits or losses on the bonds would depend significantly on the extent to which it hedged its foreign-exchange exposure. Reid declined to comment on the firm’s hedge position.

When Argentina issued the debt two years ago, the nation’s benchmark rate was a more modest 26% amid optimism that Macri would revive an economy that stagnated under his populist predecessor Cristina Kirchner. Now, the rate is almost triple that and Kirchner is expected to return to office as the vice president on front-runner Alberto Fernandez’s ticket.

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