What if the discount on Argentina's sovereign debt is overdone?
”This time is different” for Argentina’s latest sovereign debt crisis – but not in a good way. For one thing, the current dilemma comes just shy of one year after a record standby bailout agreement with the International Monetary Fund (IMF) – which could make getting further relief harder than before. Indeed, the rapid devaluation of Argentina’s peso vs. the dollar has driven the local-currency value of its debt high enough that the country might have difficulty qualifying for the IMF’s scheduled September portion of its scheduled bailout payment.
This most recent phase of Argentina’s problems was brought about by the decisive 15-percentage-point defeat of President Mauricio Macri’s party in the August 11 primaries. Given current economic strains, the underlying dissatisfaction was not surprising. But the markets are clearly dismayed by the prospect of a potential return to the “Kirchnerist” policies if Macri’s party is pushed aside – policies which included the restrictions on capital flows and imports that helped fuel Argentina’s 2014 default. The general election is scheduled to take place on October 27, 2019.
Century Bond Political Blues
Source: Bloomberg, as of 8/20/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Brandywine Global points out, however, that Argentina is actually well-positioned in terms of foreign reserves, at 1.4 times its overall money supply, or a full 13 months’ worth of imports. This suggests the current crisis in related financial markets could be overdone – or unnecessary, if the election ultimately supports the incumbent Macri.
On the rise: U.S. Treasury yields: only game in town?
Setting aside concerns about the yield curve and recession, a look at the bond market’s total return in 2019 highlights moves of remarkable scale.
Treasuries as a group have appreciated1 over 10.5% since the end of July alone. That upped the year-to-date figure to just under 8%.
The gains in bonds across nearly all sectors of U.S. fixed income is, of course driven by the hunger for increasingly scarce income, and sharp differentials in available yields. 5-year U.S. Treasury yields, now at 1.421%, far outshine German 5-year yields, now at -0.913%. The only positive yields in Europe to be found at that maturity level are in the U.K., (0.365%), Italy (0.798%), and Greece (1.115%). Which make greater-than-zero sovereign bond yields nearly the only game in town, at least for the moment.
On the slide: Yields for euro-denominated corporates
On August 13, 2019, the yield on a Nestle euro-denominated bond, maturing in about ten years, (November 2029) dropped below zero percent.2 By August 20, three other corporates followed –Airbus of October 2029, Walmart of September 2029, and Sanofi of March 2030.
If these market conditions continue, corporate borrowing via issuance in euros will likely become more difficult to resist – which could eventually act as a counterbalance to these declining yields, if the activity were to become great enough.
All data Source: Bloomberg as of August 20,2019, unless otherwise specified.
1 Source: Bloomberg, August 20, 2019, as measured by the Bloomberg Barclays U.S. Treasury Index.
2 Nestle Finance International Ltd, Sanofi 1 3/8 of 3/2030, Airbus 2 1/8 of 10/2029, Walmart 4 7/8 of 9/2029
The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.
The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
“Kirchnerist” refers to policies of former Argentine President Cristina Fernandez de Kirchner, which included resistance to free trade and participation in the global economic system – macroeconomic management of the 2000s that culminated in a technical default in 2014.