Argentine Bonds Rally on Fernandez Pledge for Dollar Repayment

Argentine local-law bonds posted their biggest two-day gain in three years after President Cristina Fernandez de Kirchner said the government won’t renege on paying back dollar-denominated bonds in greenbacks.

The comments eased investors’ concern after Argentine assets plunged two days ago on speculation dollar bonds and bank deposits would be converted into pesos in a bid to save foreign reserves needed to defend the currency.

Yields on notes due in 2015, known as Bodens and subject to local law, fell 128 basis points, or 1.28 percentage point, to 17.86 percent. The yields extended their two-day drop to 303 basis points, the biggest since June 2009. They rose 319 basis points on June 11.

“We are repaying the holders of these bonds in dollars as we should,” Fernandez said last night in a Buenos Aires speech.

A draft bill sent to the Senate on June 8 says debtors may pay foreign currency obligations with the equivalent in pesos at the official exchange rate. The proposal doesn’t specify what type of debt would be affected under the measure and doesn’t say whether it includes existing or only new contracts.

Justice Minister Julio Alak said yesterday Argentina won’t convert existing contracts denominated in U.S. dollars or other foreign currencies into pesos.

“It’s important to clarify that there won’t be a pesofication of existing foreign currency contracts or of foreign currency savings,” he said.

The extra yield investors demand to own Argentine government bonds over U.S. Treasuries fell 28 basis points to 1,103 basis points, the biggest drop among Latin American countries in JPMorgan Chase & Co.’s EMBIG index.

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