Best CPI-Linked Bonds Overlooking Data-Rigging Concerns: Argentina Credit

Argentine inflation-linked bonds are posting the best returns in emerging markets even as Goldman Sachs Group Inc. and Moody’s Investors Service say the government’s data on consumer prices are inaccurate.

The securities returned 44 percent in local currency terms this year, more than double the 15 percent gain in Barclays Plc’s nine developing-country inflation debt index. Turkish debt returned 20 percent, Mexican securities climbed 17 percent and Brazilian notes rose 13 percent, according to the index.

While Goldman estimates Argentine inflation is running more than twice as fast as the government says and Moody’s cites the reliability of the statistics in holding back an upgrade, the rate investors earn on the bonds is too high to pass up, according to Alberto Bernal, head of fixed-income research at Bulltick Capital Markets. Argentina’s consumer price-linked bonds due in 2018 yield 7.58 percent, providing investors with an annual payout of about 19 percent when adding the official 11.1 percent annual inflation rate in September.

“When you start looking around the world, you can’t find anything that pays you the same kind of return, you just can’t find it,” said Bernal, who joined Bulltick, a Miami-based brokerage that focuses on Latin America, in 2008. “Even if nothing happens, if the government doesn’t change the way they report inflation, yields are still attractive.”

‘Serious Inflation’

The official inflation rate compares with the 25 percent level estimated by Alberto Ramos, a Goldman Sachs economist in New York, and Ecolatina, a Buenos Aires-based research company that tracks the prices of about 5,000 goods and services. South America’s second-biggest economy faces a “serious inflation challenge,” Ramos said in a Sept. 15 report.

Argentines expect prices to rise 30 percent over the next year, according to a monthly survey published yesterday by Buenos Aires-based Torcuato Di Tella University. The Oct. 1-12 poll of 1,209 people had a margin of error of 3.5 percentage points.

Barclays’s Emerging Markets Government Inflation-Linked Bond Index tracks debt from Argentina, Brazil, Chile, Colombia, Mexico, Poland, South Africa, South Korea and Turkey.

Yields on Argentina’s consumer price-linked bonds due in 2018 compare with 5.78 percent on government inflation-linked debt due in 2017 in Brazil, where annual inflation was 4.7 percent in September. Argentina’s national statistics institute reported today in Buenos Aires that consumer prices rose 11.1 percent in September from a year ago, meeting the median estimate of six economists surveyed by Bloomberg.

Officials at the Economy Ministry didn’t respond to messages left by Bloomberg seeking a comment. Economy Minister Amado Boudou said in an April 14 interview that the data is accurate.

20 Percent

“Whatever alternative estimates of inflation people work with, in the end they match the formal ones pretty well because in terms of the yield on these bonds you’re still getting something in the 20 percent range,” said Daniel Volberg, an economist with Morgan Stanley in New York.

Doubts about the accuracy of official inflation in Argentina makes the comparison of inflation-linked debt in the country to other nations’ bonds not “valid,” said Edwin Gutierrez, who manages about $6 billion of emerging-market debt, including Argentine inflation-linked securities, at Aberdeen Asset Management Plc in London.

“Argentine linkers are kind of a false construct,” Gutierrez said. “Inflation in Argentina is what the government wants it to be.”

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries fell 10 basis points, or 0.10 percentage point, to 575 at 3:37 p.m. New York time, according to JPMorgan Chase & Co.

Credit-Default Swaps

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose 21 basis points yesterday to 689, according to data compiled by CMA. 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.

Warrants linked to economic growth fell 0.08 cents to 12.45 cents, according to data compiled by Bloomberg.

Industrias Metalurgicas Pescarmona SA, a Buenos Aires-based manufacturer of turbines and generators, sold $50 million of bonds in a re-opening of its 10.375 percent debt due in 2020, according to a person familiar with the offering. The debt was sold at 99 cents on the dollar to yield 10.54 percent, according to the data.

Provincial Bonds

Buenos Aires province sold $250 million of bonds on Oct. 13 in a re-opening of its 11.75 percent securities due in 2015, according to a person familiar with the offering. The province sold the securities to yield 11.5 percent, said the person, who declined to be identified because he’s not allowed to speak publicly. Bank of America Corp. and Deutsche Bank AG managed the offering, the person said.

Argentina’s economy expanded an average of 8.5 percent per year from 2003 to 2008 and grew 0.9 percent last year, amid a global financial crisis that hurt the country’s exports. The central bank said the economy will expand 9.5 percent this year, the most since 1992, fueled by a record soybean crop, rising industrial production and domestic consumption.

Doubts about the accuracy of Argentina’s inflation data is one reason the country’s debt rating is unlikely to be raised in the “short term,” Gabriel Torres, an analyst at Moody’s, said Oct. 7 at an event in Buenos Aires. Moody’s rates the country B3, six levels below investment grade.

Inflation-linked bonds are surging in part because concerns over the accuracy of the data will probably prevent the government from selling more of the debt, Volberg said.

“Because of questions about the quality of the inflation statistics in Argentina, there’s not a great deal of demand for new issuance,” he said. “It’s unlikely that you’re going to get a great deal of supply in the near term so the bonds benefit from that.”

To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net; Ben Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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