`Cheap' 2017 Local Debt Set to Rally as Yields Converge: Argentina Credit
The record difference in yields between two Argentine bonds due in 2017 is prompting Gramercy and Aberdeen Asset Management to bet that the local securities will outperform their overseas peers.
The yield on Argentine dollar bonds sold under local law rose to 11.42 percent on Sept. 23, or 188 basis points more than similar-maturity securities issued overseas, according to data compiled by Bloomberg. The gap shrank to 132 by Oct. 1 and may fall to 50, said Ajay Jani, who helps manage about $2.5 billion with Gramercy, a Greenwich, Connecticut-based investment fund.
The domestic notes “are a compelling value,” Jani, who bought the local debt last week, said in a telephone interview.
Argentine bonds offer the highest yields in developing markets, after Ecuador and Venezuela, according to JPMorgan Chase & Co. indexes. Argentine debt last month beat all emerging-market bonds as rising exports pushed central bank reserves to a record $51.2 billion and a credit-rating increase boosted confidence in the economy.
The yield on the 7 percent domestic notes, called Bonar Xs, was fell 16 basis points to 10.48 percent at 5:23 p.m. New York time, according to Bloomberg pricing. The yield on the 8.75 percent global bonds was little changed at 9.36 percent.
Edwin Gutierrez, who manages about $5 billion worth of emerging-market debt at Aberdeen in London, said he also bought Bonar X bonds due in 2017 because they were “cheap.”
The Bonar’s yield may fall to about 7.5 percent by the end of 2011, said Jani of Gramercy, which specialized in emerging- market debt.
The global Argentine bond was issued in June as part of President Cristina Fernandez de Kirchner’s $12.2 billion defaulted debt swap. The Bonar Xs and other local bonds are sold under Argentine law. The global dollar bonds are governed by New York law.
Argentina’s central bank estimates growth in South America’s second-largest economy after Brazil will accelerate to 9.5 percent this year, the fastest pace since 1992, as farmers sell a record 55-million metric ton soybean crop and car sales surge to the highest level ever. Argentine industrial production rose 10.1 percent in August from a year earlier, more than the 8 percent median estimate in a survey by Bloomberg.
The extra yield investors demand to own Argentine dollar bonds instead of U.S. Treasuries slid four basis points today to 658, according to JPMorgan. Argentina’s so-called spread is the highest after Venezuela, at 1142 and Ecuador, 1013.
“The current risk premium on Argentine debt is well in excess of what we think is reasonable given what is going on in the country economically,” said Jani.
The peso was little changed at 3.9614 per dollar. The currency touched 3.9755 per dollar on Sept. 28, its weakest level since its inception in 1992. Warrants linked to economic growth were unchanged at 11.97 cents, according to data compiled by Bloomberg.
The cost of protecting Argentine bonds against default for five years using credit-default swaps rose 18 basis points today to 755. The swaps dropped 200 points during September, the biggest decline among government debt worldwide. 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.
Buenos Aires province sold $550 million of 11.75 percent notes to yield 12 percent on Sept. 27, according to Bloomberg data. Bank of America Corp. and Deutsche Bank AG managed the sale of the dollar bonds, which mature in October 2015.
Empresa Distribuidora y Comercializadora Norte SA, Argentina’s biggest power distributor, last week opened an offer to exchange 10.5 percent bonds due in 2017 for 9.75 percent notes that mature in 2022 plus cash. The swap closes Nov. 1.
Economy Minister Amado Boudou in May delayed a $1 billion sale of global 2017 bonds as part of Argentina’s debt restructuring, saying the country would wait for yields to fall below 10 percent.
Fernandez said Sept. 24 that she isn’t interested in selling bonds at an 8 percent yield while the government can still use international reserves to pay debt. The government has tapped $5 billion worth of reserves this year and plans to use another $7.5 billion in 2011, Boudou told lawmakers Sept. 16.
The surge in Bonar X yields relative to their 2017 global peers may be related to sales of the Bonar securities by the Argentine government pension agency, Anses, said Gutierrez from Aberdeen. Anses Executive Director Diego Bossio didn’t return a phone call and e-mails seeking comment.
Aberdeen recently bought local law 2017 bonds on the expectation that the yield gap against the global bonds will tighten, he said. The gap between the securities could widen again in the future if supply picks up, Gutierrez said.
“They’ll have more to sell at some point,” Gutierrez said.
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