Alphacast Highlight: Inflation-linked bonds forward rates
By Mariano Sanchez Moreno (msanchez@alphacast.io)
Read more Alphacast Highlights here
For those who follow Argentina's capital markets, this chart might be the most important one to track in the coming months. The green line is the forward rate of inflation-adjusted bonds (CER Boncer bonds), but maturing in Aug-23 and Mar-24. Between that time frame, the primary and general presidential elections will take place, which will define the political force that will form the next Administration.
In this hands-on guide, we will show how to use Alphacast to do the math regarding forward rates.
In this case, we want to know how much a new CER bond should yield (i.e. its IRR) in Aug-23 and maturing in Mar-24. To solve it, we will fetch our bond dataset (from IAMC), which has IRR, MD, parity, time to maturity, among other figures.
Before any calculation, a quick look at the structure of the dataset (long format, top of the image) shows that the tickers are stacked one above the other. But to perform operations between bonds (rows), we need first to "unstack" the dataset, so that the prices/IRR/etc are in columns (wide format, bottom of the image).
This kind of transformation does not need to be done in Excel or Python. Just use Alphacast's pipelines! First, create a pipeline that fetches the input dataset. Second, change the format from "long" to "wide" (unstack dataset). Third, select the columns you require for the calculations and discard the rest (not mandatory, but it is good for keeping your pipeline nicely ordered). Finally, use the "calculate variable" step to calculate the forward rate for both bonds. With the calculations done, the data will be automatically updated every day and no further action from the user will be required!
Now, let's try to interpret the data (the result of our pipeline!). Investors seem to be pricing in two events:
1.In Aug-23, a Boncer maturing in Mar-24 should return a "real" rate of 21% (it peaked at 37% with the sell-off of the FCI CER in Jun-22). This would imply a large, discrete jump in the real rate, given current inflationary dynamics.
2.A possible/potential reprofiling/default post 2023 elections. In a nutshell, that the bonds maturing during the next Administration will not be paid according to their issuance prospectus.
The probability of occurrence of both events is up to each investor. As a hint, the market sometimes overreacts in volatile environments, but (in general) it moves in the right direction. With the available market data, investors seem to be very wary about the bonds' prospects for the coming years.
