Election Fears Draw Inverted Yield Curve Argentine Style

(Bloomberg) -- Argentina’s sovereign yield curve just inverted as a rampant dollar and heightened election concerns led investors to ditch the nation’s short-term debt.

The yield on the nation’s dollar bonds due 2021 jumped 242 basis points on Wednesday to a record high of 16.85 percent on concerns former President Cristina Fernandez de Kirchner may return to power in October’s election. A rally in the dollar, which caused a bloodbath in emerging-market currencies, did nothing to help.

Election Fears Draw Inverted Yield Curve Argentine Style

Fernandez would likely reverse President Mauricio Macri’s tax and spending cuts, and potentially reimpose currency controls, should she win the election. As jitters over her return grows, investors are demanding a 560 basis point premium to hold debt due in 2021 instead of bonds maturing in 2028. A week ago, that spread was of 200 basis points, and a month-and-a-half ago, it was zero.

“Markets are reacting adversely to the possibility of a return of a populist administration,” said Mauro Roca, managing director of emerging markets at TCW, which oversees about $191 billion. Still, “at this point, nobody can project with any degree of certainty the outcome of the presidential elections.”

The deterioration in market expectations for the Argentine economy is even clearer in credit default swaps contracts. The spread on five-year contracts was quoted at 1,096 basis points, according to prices compiled by Intercontinental Exchange, Inc. That puts the probability of a default over that period at 54.1 percent, up from 22.7 percent just one year ago, Bloomberg data indicated.

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