Argentina: inflation-linked peso bonds take a dive
Argentina’s clampdown on foreign currency purchases has claimed another victim: peso-denominated bonds. Argentina’s inflation-linked peso bonds have lost an average of 15 per cent so far this year, reports Bloomberg, quoting data compiled by Barclays.On the surface, the bonds certainly look attractive. The inflation-linked Argentine bonds due in 2033 yield 14.3 per cent plus the official annual inflation rate, according to Bloomberg. But that plus is the problem. The annual inflation rate as reported by INDEC, the national statistics agency, sits at 9.9 per cent. But many private economists say that INDEC has woefully underreported inflation since the Argentine government intervened in INDEC in 2007, and that the current annual rate is closer to 25 per cent.
Under that rate-fiddling scenario, a bond at 14.3 per cent plus official inflation looks far less attractive to investors, which may explain why inflation-linked bonds in nearby Brazil, which yield a much lower 4.6 per cent plus the official inflation rate, have gained 3.4 per cent in value this year while Argentina’s have lost.
Worse for Argentine bonds, many investors expect unofficial inflation to increase, making them even less willing to buy inflation-linked peso bonds. Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York, told Bloomberg that:
The markets see that the gap between the real inflation and the reported one will widen this year and that makes them less willing to take CPI [Consumer Price Index]-linked bonds.Restrictions on buying dollars also steer bond investors away from the peso bonds. As we reported recently, the Argentine central bank no longer allows people to convert pesos to dollars for savings, making it almost impossible to get foreign currency in Argentina. This means that investors who want to cash in their peso bonds for buy foreign currency have to buy it on the black market at a high premium (6.21 versus 4.57 pesos to the dollar, for example). Paul McNamara, who manages emerging-market debt at GAM Investment in London, told Bloomberg that:
When we buy assets in Poland or Mexico or South Africa, we purchase the local currency to buy assets and, when we sell them, we can freely convert the currency back into dollars. That’s not the case in Argentina. To the extent there are more problems turning peso assets into dollars abroad, the less desirable peso assets are going to be.This hammering being given to the peso bonds, as well as the spread between the official and black market exchange rate, have led many investors (and Argentine locals) to expect a devaluation, albeit a gradual one, in upcoming months. It has also led some local investors to buy dollar-denominated bonds, which on the surface offer little return but when calculated at the black market rate offer much more in pesos.
“As buying dollars is impossible and fixed-term deposit interest rates are so low, the people are attracted by assets that let them take refuge in foreign currencies,” Paula Premrou, director of Portfolio Personal, told Clarín, Argentina’s largest newspaper.
That refuge is at least better than stuffing ones’ currency in the mattress, and certainly more comfortable when it comes time to sleep.
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Argentina: more dollar restrictions, beyondbrics
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