Bond Traders Lock In Argentina's 31.5% Yields as Rate Cuts Loom

  • Economic slump may lead central bank to lower borrowing costs
  • Policy makers have boosted key rate to curb inflation

Argentina has ratcheted up interest rates above 30 percent to combat inflation, but the moves may prove short-lived amid growing concern that high rates are holding back South America’s second-biggest economy. 

That means investors should favor the central bank’s longest-dated notes -- so-called Lebacs that mature in about eight months -- to lock in yields of 31.5 percent, say Balanz Capital and Delphos Investment.

Moody’s Investors Service predicts Argentina’s economy will shrink 1 percent this year, a recession that’s fueling speculation the central bank will lower borrowing costs to revive growth. Policy makers led by central bank President Federico Sturzenegger have boosted the Lebac rates to quell annual inflation that soared above 37 percent in March. 

“The high rates are not sustainable in the long term and are definitely having an impact on the level of economic activity,” said Juan Pablo Vera, the head analyst at Buenos Aires brokerage Tavelli & Cia. “We expect that sooner rather than later, the central bank will be in a scenario where it lowers rates.”

A spokesman for Argentina’s central bank declined to comment on the outlook for interest rates.

At a press conference on Thursday, Sturzenegger said the central bank won’t lower the yields on its notes until there’s certainty that inflation rates are falling. At the Bloomberg Argentina Summit in April, he said consumer-price increases already had peaked. President Mauricio Macri on Tuesday praised the central bank’s independent policies to fight inflation and acknowledged the need to restart economic growth.

"We need to lower inflation, that’s a priority that will allow small and medium enterprises to grow and allow Argentines to live at peace," he told reporters.

Policy makers will begin to lower rates sometime in the next three to six weeks, said Walter Stoeppelwerth, chief investment officer of Balanz in Buenos Aires.

“So what you have to do is climb on the long end of the curve,” he said. “You can get some capital gain and you lock in the rate.”

While Argentina’s economy is struggling, the nation’s success at ending a decade-long legal battle with creditors have fueled investor demand for the nation’s assets. Last week, JPMorgan Chase & Co. analyst Carlos Carranza said short-term notes issued by Argentina’s central bank were among his top picks. The 35-day notes yield 38 percent.

Leonardo Chialva, a partner at Buenos Aires consulting firm Delphos, says investors should pile into the central bank’s 252-day notes as borrowing costs may begin dropping as soon as this month.

“We expect a significant price deceleration in May, which is why the risk of falling rates is increasing,” he wrote in a note Friday.

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