Just 99 Years to Go as Argentine Century Bond Hits Record

(Bloomberg) -- Argentina’s debut century bond is celebrating its first anniversary with record-high yields as a slump in the peso threatens to push the economy into recession. Still, just another 99 years to go.

The government sold $2.75 billion of 100-year bonds in June of last year, trumpeting that the arrival of President Mauricio Macri’s administration had put the serial defaulter in a new era of financial certainty.

Those claims ring hollow after a tumultuous year. The yield on the bonds reached as high as 9.31 percent on Thursday, up 143 basis points since it was sold at a discount as the peso lost 40 percent of its value, forcing the central bank to boost interest rates and fueling already high inflation. Economic activity posted its largest decline in April since Macri took office in December 2015, even as the International Monetary Fund granted a record $50 billion credit line.

“The government may celebrate, investors can’t,” said Guido Chamorro, senior investment manager of Pictet Asset Management Limited. "From a fundamental perspective, the big drop in GDP earlier this week is a bit of a nail in the coffin. Argentina needs growth.”

Even the lifeline from the IMF is “bittersweet,” Chamorro said. Bondholders are now second in line behind the multi-lateral lender should Argentina default.

“The IMF never takes a haircut, thus reducing recovery values for ‘regular’ bondholders," he said.

Global Backdrop

Economic activity fell 2.7 percent in April from the month before, and dropped on an annual basis for the first time in 14 months, the nation’s statistics agency reported Tuesday. That economic weakness will potentially complicate Macri’s plans to further cut government spending as agreed with the IMF.

The Argentine peso closed at a fresh record Thursday, reaching 28.12 pesos per dollar. That was after the central bank raised the amount sold in a daily foreign exchange auction to by $50 million to $150 million.

The worst is yet to come for the century bond, with the yield likely to break the 10 percent barrier soon as global rates begin to rise led by the U.S. Federal Reserve, Chamorro said.

“The root of the problem is that the emerging-market bond community has been positioned with a structural overweight position in frontier countries, led by Argentina as the largest overweight,” he said. “If the general international macro backdrop doesn’t improve it is very difficult to visualize who will be the buyer of the next Argentine sale."

Still, where many see bad news, others see an opportunity, said Michael J. Roche, who follows emerging markets as a New York-based strategist at Seaport Global Holdings.

"The IMF program and the presence of pro-government policy changes have encouraged money managers to accumulate the century bond on weakness,” Roche said. “Each additional 20 basis-point rise in yield from this point will bring in more demand, so getting to a 10 percent yield is possible, but may amount to one of those briefly-held opportunities."

©2018 Bloomberg L.P.

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