`Single-Worst' Emerging Asset Becomes a Buy For Augustus: Argentine Credit
Paul McNamara is piling into Argentina’s inflation-linked bonds three years after calling them the “single worst long-term asset” in emerging markets.
McNamara, 41, who oversees $4.5 billion of emerging market debt at Augustus Asset Management Ltd. in London, said he bought the notes in March and again in June on prospects they would rally on surging growth, inflation and demand for higher yields.
A plunge in prices on the country’s benchmark inflation- linked peso bonds due in 2033 sent yields soaring 2 percentage points in the first 10 months of 2007 to 7.62 percent, making the country’s debt market the world’s worst performer, as investors questioned the reliability of government consumer price data. In the past three months, yields fell more than 5 percentage points from an 11-month high of 15.12 percent as official inflation accelerated to a four-year high.
“We were only waking up to the fact that this was speculative and priced at a premium” three years ago, McNamara said in a phone interview. “Now it’s priced as speculative.”
Augustus was the second-biggest holder of the debt after Fortis Bank SA/NV as of March 31, data compiled by Bloomberg show. McNamara’s biggest investment, the Julius Baer Multibond- Local Emerging Bond Fund, has returned 8.84 percent this year, below the 11.4 percent average rate of its peers, according to data compiled by Bloomberg. During the past three months it’s returned 6.39 percent, above the 5.13 percent posted by peers.
The “global reach” for returns makes Argentine bonds linked to inflation attractive even as investors remain wary of the accuracy of data issued by the government, said McNamara.
About 25 percent of the nation’s $147 billion debt is inflation-based securities, whose principal rises and falls with the consumer price index, according to the most recent Economy Ministry report from December.
Accelerating growth in South America’s second-largest economy and rising commodity prices pushed inflation to 11.2 percent in July, the highest in four years, the National Statistics Institute reported Aug. 13. The rate is about half that estimated by Goldman Sachs Group Inc. and Credit Suisse AG.
Argentines expect prices to rise 25 percent over the next 12 months, according to an Aug. 2-11 survey by Buenos Aires- based Torcuato Di Tella University. That would be the fastest in the world after Venezuela.
Investor confidence in the inflation-linked bonds was shaken in January 2007 when President Cristina Fernandez de Kirchner’s husband and predecessor,Nestor Kirchner, made personnel changes at the national statistics agency, known as Indec.
After Indec workers, including former CPI director Graciela Bevacqua, said the inflation reports were being manipulated, McNamara said he sold his holdings. Economists and government officials including Vice President Julio Cobos have backed the assertions.
In the eight months that followed, the yield on the 2033 inflation-linked bond, first issued in 2005, climbed 3.4 percentage points to 8.62 percent from as low as 5.24 percent in January 2007.
An Economy Ministry spokesman didn’t respond to phone calls seeking comment. Economy Minister Amado Boudou said in an April 14 interview that the price reports are accurate and that complaints about the data come from wealthier residents and investors trying to make more money from the inflation-linked bonds.
“It’s understandable that other sectors of the population, especially the middle and upper class, have a perception that prices” are high, Boudou said in the interview, adding that the government was seeking to change how prices are measured.
The likelihood for data changes under Fernandez “is roughly zero,” McNamara he said. “The point is more that the implied real yield is sufficiently high that these are reasonably attractive as one of the high risk parts of your portfolio.”
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries slid one basis point to 682 at 9:46 a.m. New York time, according to JPMorgan. The difference is down from 846 on July 1.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps climbed four basis points yesterday to 821, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Yields on Argentina’s benchmark dollar bonds due in 2015 slid two basis points to 10.40 percent. Warrants linked to economic growth declined 0.06 cent to 10.19 cents on the dollar. GDP will expand 9.7 percent in 2010, the fastest pace since 1992, according to a forecast from Morgan Stanley.
Argentina’s peso slid 0.2 percent to 3.9356 per dollar.
Silvia Marengo, a money manager who oversees Latin American debt with Falcon Private Bank in Zurich, said investors may be drawn to inflation-linked debt now that the government is taking steps to reform national statistics reporting.
The Senate voted on Aug. 11 to make Indec independent from the central government. The lower house has yet to debate the bill.
Quickening inflation and a slowly depreciating currency are also making CPI-linked peso bonds attractive, Marengo said.
“You can have high inflation and a peso that doesn’t depreciate much for a period of time in Argentina,” said Marengo, who said she doesn’t own the country’s bonds. “Everyone expects to jump out before the correction happens.”
McNamara said he recognizes that inflation-linked debt isn’t for everyone.
“We would categorize these as high risk investments,” he said.
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