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Yields at 10-Week Low as Money Supply Expands: Argentina Credit

Sept. 2 (Bloomberg) -- Yields on Argentine three-month notes are poised to fall after declining to a 10-week low as the central bank prints pesos faster than anticipated.

Yields may drop to 10 percent by November as banks seek shorter maturities to hedge against inflation, said Fausto Spotorno, an economist at research firm Orlando Ferreres & Asociados SA. This week Argentina sold 367 million pesos ($92.9 million) of 91-day fixed-rate notes, known as Lebacs, at an implied yield of 12.15 percent, the lowest since selling 211 million pesos of 84-day securities on June 22 at 11.01 percent.

Argentina’s money supply is growing faster than policy makers projected this year, leaving banks awash with cash and pushing down yields. The central bank, which is fueling money supply growth by selling pesos for dollars to weaken the currency and shore up exports, raised its 2010 monetary targets on Aug. 26. Foreign reserves rose to a record $51.1 billion last month.

“Yields are probably falling because there is a lot of liquidity in the banks,” said Carola Sandy, an economist with Credit Suisse Group AG in New York. “The banks are getting all of these deposits and they don’t have anything to do with them.”

Central bank President Mercedes Marco del Pont boosted the growth limit on the country’s money supply for this year to 29.4 percent last week from 19 percent. The increase will ensure monetary policy won’t be “restrictive or inhibit economic growth,” Marco del Pont said in a statement.

Economic Growth

The total supply of central bank debt maturing in one month to three years rose to 57.1 billion pesos from 34.1 billion in June of last year, according to central bank data. It sold 3 billion pesos of the securities Aug. 31 with fixed yields as high as 14.3 percent for notes maturing in 497 days.

Lebac notes that mature between one and 22 months, along with longer-term variable rate bonds known as Nobacs, are primarily bought by local banks. The auctions have been closed to international investors since 2007, while the central bank opened them in July to local companies that can buy notes maturing in up to 90 days.

“In general, banks are shortening the maturities of their portfolios,” Spotorno said in an interview from Buenos Aires. “It’s all about inflation.”

Economic Growth Forecasts

The central bank forecasts Argentina’s economy will grow as much as 9.5 percent in 2010, the highest since 1992. JPMorgan Chase & Co. predicts the economy will expand by 8.5 percent this year.

The government reported last month that annual inflation rose to 11.2 percent during July, less than half the 25 percent estimate Spotorno has for this year.

Economists and government officials including Vice President Julio Cobos have questioned the accuracy of the consumer price index, saying officials have underreported price increases since January 2007, when former President Nestor Kirchner made personnel changes at the statistics agency.

“This drop in yields will likely continue,” said Aryam Vazquez, an emerging-markets economist at Wells Fargo & Co. in New York. “Primarily it’s a function of the improved fundamentals surrounding Argentina.”

Five-year credit-default swaps tied to Argentine debt slid 44 basis points yesterday to 905. A basis point equals $1,000 annually on a contract protecting $10 million of debt. 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.

The peso was little changed today at 3.9494 per dollar.

The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries fell 15 basis points, or 0.15 percentage point, to 710, according to JPMorgan.

Benchmark Yields

The yield on benchmark 7 percent bonds due in 2015 rose two basis points today to 10.94 percent, according to Bloomberg market average pricing. Warrants linked to growth in South America’s second-biggest economy rose 0.24 cent to 10.57 cents, according to data compiled by Bloomberg.

Lebac yields will likely remain near current levels, said Camilo Tiscornia, director of Buenos Aires-based research firm C&T Asesores Economicos.

“I would have said that the yields would have to rise because the money supply was near its upper limit,” said Tiscornia, who left his post as a central bank economist earlier this year. “Since the bank changed its monetary program, I think rates will remain stable.”

To contact the reporters on this story: Drew Benson in Lima at; Ben Bain in New York at

To contact the editor responsible for this story: David Papadopoulos at

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