Peso Bonds Beat Dollar Debt on Currency Bets: Argentina Credit

Peso Bonds Beat Dollar Debt on Currency Bets
Argentine peso bond returns are beating the country’s dollar-denominated debt for the longest stretch since October 2008 as investors bet the currency will weaken less than economists expect. Photographer Diego Giudice/Bloomberg

Argentine peso bond returns are beating the country’s dollar-denominated debt for the longest stretch since October 2008 as investors bet the currency will weaken less than economists expect.

The yield on peso-denominated bonds due in 2033 fell 5.65 percentage points during the past four months compared with a decline of 2.67 percentage points for dollar notes with the same maturity. The average yield on emerging market debt as measured by JPMorgan Chase & Co.’s EMBI+ Index fell 1 percentage point over the same period.

President Cristina Fernandez de Kirchner’s 2011 budget forecasts the peso falling to 4.1 per dollar next year, or 3.6 percent from yesterday’s close of 3.9518 per dollar. The currency is exceeding the median forecast of 10 economists surveyed by Bloomberg. At the end of 2009, they expected the currency to drop 7.3 percent to 4.1 per dollar by September. South America’s second-biggest economy will grow 8.9 percent this year, the most since 2005, according to the government’s budget proposal. U.S. growth is forecast at 2.7 percent, according to data compiled by Bloomberg.

“The big downward move in the peso that a lot of people were looking for didn’t materialize,” said Paul McNamara, who oversees $4.5 billion of emerging market debt, including Argentine peso bonds, at Augustus Asset Management Ltd. in London. “That is clearly a contributing factor” to the peso bond rally, he said.

The government’s peso bonds due in 2033 have returned 35.47 percent this year, more than double the 17.19 percent return on dollar bonds maturing the same year, according to data compiled by Bloomberg.

Peso Drops

The peso has fallen 3.8 percent this year, making it the worst performer among major Latin American currencies tracked by Bloomberg. Fernandez forecast a 2010 exchange rate of 3.92 per dollar in this year’s budget compared with an estimate of 4.5 per dollar in a survey of 13 economists by Bloomberg.

The currency is sliding slower than economists expected as dollars enter the country from a record 55 million metric ton soybean harvest and after Fernandez concluded a $12.9 billion defaulted debt restructuring in June.

“You’ve had positive movement in the trade accounts, you’ve had a phenomenal harvest, you’ve had strong prices in soybeans,” said Bret Rosen, a Latin America debt strategist with Standard Chartered Bank in New York. “All that’s contributed to keep the peso pretty stable.”

Credit Rating Raised

Standard & Poor’s raised Argentina’s credit rating one level to B, five levels below investment grade on Sept. 13, citing “strong” economic growth. That put the country on the same level as Lebanon, Bolivia and Jamaica.

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries rose five basis points to 685 at 12:42 p.m. New York time, according to JPMorgan Chase & Co.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps was little changed yesterday at 751, 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.

The peso was little changed today at 3.9522 per dollar, after closing yesterday at its weakest point since the currency’s inception in 1992.

Warrants linked to growth in South America’s second-biggest economy rose 0.09 cent to 11.85 cents, according to data compiled by Bloomberg.

More Debt Sales

Among future Argentine debt sales, Buenos Aires province officials plan to meet with investors in Europe and the U.S. this week about plans to sell about $500 million in debt, said a ministry official who declined to be identified because the terms haven’t been completed.

Shareholders of Aeropuertos Argentinas 2000 SA, the country’s main airport operator, last week approved plans to sell as much as $300 million in bonds due in up to 10 years. The board of Arcor SAIC, Argentina’s biggest candy maker, last month approved a program to sell up to $500 million worth of global bonds.

Argentine peso bonds, which are linked to inflation, are no longer cheap since the currency has appreciated in real terms due to high inflation, said Pablo Cisilino, who helps manage $14 billion in emerging-market debt at Stone Harbor Investment Partners in New York.

Inflation Forecast

Credit Suisse Group AG expects annual inflation by the end of the year to climb to 30 percent, more than double the official rate of 11.1 percent in the 12 months through August. Economists and politicians including Vice President Julio Cobos have questioned the government’s price reports since Fernandez’s husband and predecessor, Nestor Kirchner, began changing personnel at the national statistics institute in 2007.

“I don’t see a fundamental reason” for the peso debt rally, Cisilino said.

The peso bonds are rallying at an accelerated pace as investors, bolstered by rising expectations that the global economy is improving, seek out high-yielding local currency bonds in emerging markets, McNamara said.

“When there’s risk appetite, it’s the sort of thing that gets bought, and it’ll fall a lot more when people get spooked again,” he said.

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