Argentina Imposes Bond Limits After Wall Street Banks’ Buy Calls

  • Central bank notes have gained popularity among foreigners
  • Bank’s shorter maturity notes will only be traded locally

Argentina is limiting foreigners’ access to local notes on concern a surge in inflows will destabilize the country’s currency market after the bonds were recommended by Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp.

Some of the short-term bonds the central bank sells every week, known as Lebacs, will only be available for investors with local custody accounts and will only trade in the local market, according to a regulation that took effect Tuesday. That same day, the monetary authority cut interest rates for the third time in a month at its weekly auction, reducing their appeal for investors seeking to profit from rates that reached as high at 38 percent earlier this year.

Argentine officials are seeking to limit investments that they see as likely to be short term on concern that it will fuel excessive gains in the peso and that if sentiment changes a sudden outflow could cause a rout in the local currency. While President Mauricio Macri said luring foreign capital was a top priority when he took office in December, policy makers are being selective about the type of investments they want. The central bank securities, Argentina’s main tool for setting interest rates, began trading in international markets including Euroclear last year when the government ended most capital controls.

“Authorities seem to be concerned over the peso’s appreciation," Daniel Kerner, the head of the Latin America at consultancy Eurasia Group, said in a note.

Argentina’s central bank sells notes with maturities ranging from 35 days to 252 days at a weekly auction every Tuesday. Argentina will announce which maturities will be designated as domestic issues every Monday, according to a central bank spokesman. In Tuesday’s sale, 35-day, 63-day, 98-day and 119-day tranches could only be purchased by investors with local accounts, while 147-day, 203-day and 252-day tranches were open to all investors.

"We wouldn’t be surprised if they closed this window altogether at some point, because there’s a degree of discomfort when it comes to the Lebac trade," said Edwin Gutierrez, the head of emerging-market sovereign debt at Aberdeen Asset Management in London, who oversees an $11 billion portfolio and has invested in the longer-term Lebacs. "While initially the government welcomed the foreign money into Lebacs, they are definitely no fans of what they perceive as hot money."

At Tuesday’s auction, the bank reduced yields on notes due in 35 days by 75 basis points to 36.75 percent and yields for notes due in 252 days were trimmed by 50 basis points to 30.25 percent. The bank placed 85.7 billion pesos ($6.1 billion) of securities out of a total of 90.2 billion pesos of bids.

Since assuming power in December, Macri has taken steps to reduce state intervention in the economy, moves that are likely to put a damper on growth in the short term. Macri has said that the economy will pick up in the second half of the year while inflation will begin to slow. He has denied that the government is putting pressure on the central bank to reduce rates prematurely.

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