Alphacast Highlight - Argentina Financial Market
By Mariano Sanchez Moreno (msanchez@alphacast.io)
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By the end of 2021 and throughout the first half of 2022, inflation-linked bonds in dollars (Boncer index) remarkably outperformed local equity and hard-dollar bonds. Carry-trade profits suddenly faded away after the mid-June's Mutual fund melt-down. Signs of recovery came after BCRA started is QE program, which implied an estimated market intervention of ARS 1.1tr
Until last June, Argentine bonds traded in line with emerging market or high credit risk bonds. However, the Mutual Fund crisis and the following political volatility deepened Argentina's risk perception, spreading the performance gap between its NY-law bonds (-29.3% YTD) and benchmarks ($EMB -19.5% YTD, JNK -12.9% YTD).
Such local drivers were translated into a higher devaluation pressure of the Argentine peso (official FX +35.5% YTD, FX informal +37.4% YTD and BCS +40% YTD), contrary to the region (CLP +1.2% YTD, MXN -2.4% YTD and BRL -7.1% YTD).
Not only does the BCRA seeks to suffocate this pressure by selling international reserves (net FX seller -72.4mn YTD) to defend the official FX rate, but also in FX futures markets (FX futures short position USD 7,072bn as of July).
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With respect to inflation, the bonds price an average annual inflation of 78% until 2026. Although the turbulence regarding a reprofiling of inflation-linked debt (CER) in 2022 seems to have passed, forward rates would price higher probability of default by the government on the ERC debt after the 2023 PASO elections.
