Volatility Doubles as Singer Spooks Investors: Argentina Credit

Billionaire Investor Paul Singer
As litigation persists between Argentina and investors led by Paul Singer’s Elliott Management Corp. seeking payment of the full value of their defaulted bonds, investors should sell Argentine debt, said Vladimir Werning, an analyst at JPMorgan in New York. Photographer: Jacob Kepler/Bloomberg

The U.S. court battle between Argentina and billionaire investor Paul Singer over the country’s defaulted debt is spurring a two-fold surge in bond market volatility.

The degree of daily price variations in dollar-denominated debt from South America’s second-biggest economy averaged 54, almost 20 times the volatility for bonds sold by 52 developing countries in JPMorgan Chase & Co.’s EMBI Global index, and three times that of Belize, the second most volatile. A year earlier, price swings for Argentine bonds measured 21.8, then five times the emerging-market average.

As litigation persists between Argentina and investors led by Singer’s Elliott Management Corp. seeking payment of the full value of their defaulted bonds, investors should sell Argentine debt, said Vladimir Werning, an analyst at JPMorgan in New York. After adjusting for price swings, Argentine bonds lost 0.14 percent since Oct. 8, compared with a 1.05 percent gain in Venezuelan debt, the Bloomberg Riskless Return Ranking shows.

“Investors holding bonds in the face of this volatility are not patient enough to wait” for a legal resolution, Werning said at a Jan. 7 Emerging Markets Traders Association seminar in New York. “Markets are about disequilibrium and guessing the future at every single point in time. So at this point, I’m quite uncomfortable.”

Judge’s Order

Werning changed his recommendation for Argentine bonds to underweight from marketweight the same day, citing their 24 percent rally since Nov. 28, when an appeals court in New York delayed a district judge’s order blocking the nation from making payments on its restructured debt if it didn’t pay $1.3 billion to owners of defaulted notes at the same time.

Argentina will present oral arguments against Judge Thomas Griesa’s ruling on Feb. 27, after which the appeals court could reach a decision within three months, according to Henry Weisburg, a partner at New York-based law firm Shearman & Sterling LLP.

The rally pared losses in Argentine bonds to 10.2 percent since Oct. 25, the day before the appeals court upheld a previous ruling by Griesa that Argentina must treat all bondholders equally. Bonds plunged 10 percent the following day on concern that Argentina would opt to default rather than comply.

Yesterday, Argentine dollar bonds fell 3.8 percent on average, the most since Nov. 26.

‘Negative Outcome’

The losses aren’t over, according to Sebastian Vargas, an analyst at Barclays Plc in New York. While the country, which hasn’t tapped international markets since its $95 billion default in 2001, faces increasing pressure to negotiate with holdouts, President Cristina Fernandez de Kirchner probably won’t hold talks until she reaches the brink of a second default, he said.

“We might see external bond prices much lower than today before we see the light at the end of the tunnel,” Vargas said in the seminar. “In the end, you still need a negative outcome before Argentina can turn eventually pragmatic down the road, and that can take some time.”

The implied probability of default in the next year based on trading in credit-default swaps is 40 percent, down from a record 85 percent on Nov. 26, according to data provider CMA Ltd., which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Corporate Bonds

The cost to protect against Argentina defaulting using five-year swaps rose 217 basis points yesterday, the most in six weeks, to 1,651 basis points, according to data compiled by Bloomberg. The contracts reached a three-year high of 3,898 on Nov. 26. The cost of insuring Argentine debt against non-payment remains the highest in the world.

In the past three months, the volatility of Argentina’s corporate bonds, which won’t be directly affected by the U.S. court ruling, surged to 8.4 from 4.5 a year earlier. On average, the volatility for emerging-markets corporate bonds in JPMorgan’s CEMBI Broad index fell to 1.6 from 3.5. Higher volatility means an asset can fluctuate within a wider range of prices in a short period, increasing the potential for unexpected gains or losses.

Future bond price swings will provide opportunities for investors to profit, according to Hans Humes, president of Greylock Capital Management LLC in New York.

Provincial Notes

“You can take plenty of advantage of the volatility that you will have with some of the headlines coming over the next few months to make money without betting on the decisions of the courts,” Humes said at the Jan. 7 seminar.

After the last selloff, Humes said his company, which manages more than $500 million in emerging-market debt, added to its holdings of Argentine debt by buying provincial bonds.

Warrants tied to Argentina’s economic growth, which plunged 2.5 cents after Griesa’s decision jeopardized their Dec. 15 dividend payment, posted a 3.12-cent rally ahead of the 6.3-cent payout. Since then, they gained as much as 1.25 cents before declining to 6.13 cents at 2:50 p.m in New York.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries rose six basis points, or 0.06 percentage point, to 1,026 basis points, according to JPMorgan.

The peso weakened 0.1 percent to 4.9360 per dollar.

Fernandez will avoid negotiating with the so-called holdout creditors she calls “vultures” because she has turned the issue into one of national pride, said JPMorgan’s Werning. As a result, it’s difficult to imagine a solution that’s favorable to current investors while she remains in power, he said. Fernandez’s term, her second, ends in December 2015.

“There will be some disruption,” Werning said.

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