One year ago, when yield-starved investors were chasing for yield, any yield, in the remotest places of the globe, Argentina triumphantly returned to markets, with a bond issue that shocked many: a 100 year bond. And while many warned that either the massive duration risk of this issue, or just Argentina’s inherent economy instability would make the eager investors sorry in the very near future, euphoric managers of “other people’s money” wouldn’t hear of it.
Well, fast forward today when Argentina’s debut century bond just celebrating its first anniversary, just in time to prove all the skeptics right as the issue just hit an all time low price of just 76 cents on the dollar…
… and inversely, record-high yields of 9.3%…
… as the collapse in the Peso and the sharp slide of the economy threatens to push the economy into recession.
There were no clear signs any of this would happen: last June, the government sold $2.75 billion of 100-year bonds trumpeting that the arrival of President Mauricio Macri’s administration had put the serial defaulter in a new era of financial certainty. And investors believed it: the offering was 3.5x oversubscribed.
Exactly one year later, the yield on the bonds just hit a record 9.31%, up nearly 1.5% 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. Meanwhile, the economy is in shambles: GDP posted its largest decline in April since Macri took office in December 2015, even as the IMF granted the serial defaulting Latin American nation a record $50 billion credit line.
“The government may celebrate, investors can’t,” said Guido Chamorro, senior investment manager of Pictet Asset Management Limited quoted by Bloomberg. “From a fundamental perspective, the big drop in GDP earlier this week is a bit of a nail in the coffin. Argentina needs growth.”
Making matters worse for bondholders they have been “primed” and 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” Chamorro added.
Unfortunately, with the Argentina economy rapidly sliding into a recession, it looks that they will be primed: economic activity fell 2.7% in April from the month before, and dropped on an annual basis for the first time in 14 months, the country reported Tuesday. That collapse will complicate Macri’s plans to further cut government spending as agreed with the IMF.
But the worst is yet to come for the century bond, and according to Chamorro the yield is likely break the 10% barrier soon as global rates begin to rise led by the U.S. Federal Reserve.
“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.”
Not everyone is angry: according to Seaport’s emerging markets analyst Michael J. Roche, “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.”
Which of course is what investors were also saying one year ago when the bond was first issued.
Meanwhile the currency’s collapse has resumed with the peso back above 28/USD, closing at a record low close.
Read on ZH