Buenos Aires Yield Surge Versus Government Means Buy to Elypsis

Buenos Aires province bonds are yielding about the most over Argentine government notes since early September, prompting research company Elypsis to recommend buying the securities.

Yields on Buenos Aires province 2015 dollar bonds surged 177 basis points, or 1.77 percentage points, in the past month to 13.78 percent, while the government’s borrowing costs for similar maturity notes fell 35 basis points to 8.55 percent. The moves brought the yield gap to 517 basis points after widening to as much as 527 last week, the most since Sept. 9.

The province, which accounts for about half of Argentina’s gross domestic product, is rated CCC+ by Standard & Poor’s, the same as the government and seven levels below investment grade. Buenos Aires is also seeking to tap international credit markets, which would allow it to increase liquidity, according to analysts at Buenos Aires-based Elypsis.

“Buenos Aires province bonds shouldn’t be pricing a default probability that is so much higher than the government’s,” Eduardo Levy Yeyati, Andres Azicri and Luciano Cohan wrote in a Dec. 23 research report to clients.

Bonds sold by the country’s most populous province are falling on concern local authorities’ finances will deteriorate. Inflation estimated at 26 percent prompted police across the country to go on strike to back demands for wage increases from provincial governments.

The Buenos Aires province’s 2035 bonds returned 43 percent this year, the best performance among Argentine provincial debt securities after the 57 percent return on Mendoza’s 2018 bonds, according to data compiled by Bloomberg.

The gains compare with average returns of 18 percent for Argentine government dollar bonds and losses of 5 percent for emerging-market securities.

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