Argentina Inflation: Cautious Optimism

Mid Week Bond Update

Argentina Inflation: Cautious Optimism

Argentina's IMF-supported recovery is showing early signs of success.

Argentina’s record-breaking September agreement with the International Monetary Fund (IMF) contained a unusual feature designed to reduce inflation pressures: an aggressive target of 0% growth in the country’s monetary base.[1]

Though the ink is barely dry, there are signs that the agreement may be gaining traction. First, growth in Argentina’s money supply, as measured by M2, [2] is headed downward, coming in at the end of October at about a 15% growth rate -- down more than half from its 2017 peaks in the 35% range. That’s especially notable given the $57 billion in loans from the IMF.

Second, inflation for the month of October 2018 came in at a 5.4% monthly rate, down from 6.5% in September, avoiding the runaway hyperinflation that can take hold when the market views rescue measures as inadequate. However, with the most recent annual inflation rate at 46%, it will take time for even the most successful measures to echo through the country’s economy.  


Chart: Courtesy Brandywine Global, Nov 19, 2018. Sources: BRCA (Argentina's central bank), Argentina’s Bureau of Census, (Dirección Provincial de Estadísticas y Censos, Historia (DPEyC/H), Haver Analytics. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


The chart above (courtesy of Brandywine Global) suggests that Argentina’s  money supply has been closely linked to inflation, although with a lag. That augurs well for the country’s progress as it gets its own financial house in order. If the Argentina/IMF plan ultimately succeeds, the prospect of high yields and currency appreciation could prove attractive once again to adventurous investors.

On the rise: U.S. credit spreads

There’s been a notable pickup in credit spreads in the U.S. since the start of the quarter, with the average investment grade spread rising from 105 basis points (bps) on October 1 to as much as 132 bps on November 20.[3] For U.S. high-yield debt, the spreads have widened more dramatically, from 309 bps to as high as 426 bps over the same period.

The moves, though notable, are not altogether surprising given recent dynamics in the energy sector.  In the market for corporate bonds, energy companies , especially exploration and pipeline companies, borrow heavily to finance growth when fuel prices rise. But since the end of September, the spot price of Brent Crude Oil is down nearly 30%, from $84.98 to $60.36; WTI crude fell just over 31%, to $51.66. 

In addition, some of the uncertainties of the current global trade regime may have discouraged capital investment by U.S.-based companies looking for opportunities whose return on capital is sufficiently predictable to anchor new borrowing. So even though the quarterly earnings season just now winding down exceeded expectations for many companies, future earnings, as well as company-led investments, may leave spreads at their current levels, if not higher.

On the Slide: U.S. Capital Expenditures

The most recent figures from the U.S. Bureau of Economic Analysis show non-residential business investment rose 0.8% for the quarter ended September 30, 2018, versus the previous quarter.  That’s a much slower level of growth than seen in the two previous quarters (8.7% in Q2  and 11.5% in Q1)  – and may have contributed to the strong earnings reported by corporations for Q2 and Q3.

These figures are watched carefully for clues about future growth in the U.S. economy, with capital expenditures (capex) seen as a harbinger of growth, as well as of optimism about the availability of investment opportunities.

But the relationship between capex and future growth is by no means certain; in part because there are both sources and uses of capital outside the U.S. that could contribute to U.S. growth. In addition, any reduction of policy uncertainty or geopolitical tension could result in a rapid change in the investment outlook of U.S. corporations as they plan for future growth.


[1] The monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.

[2] M2 is a measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money" in M2 includes savings deposits, money market mutual funds and other time deposits.

[3] As measured by the Bloomberg Barclays U.S. Aggregate Corporate Average Option-Adjust Spread (OAS).


A spread is the difference in yield between two different types of fixed income securities with similar but not identical characteristics, such as maturity, credit quality or currency.

One basis point (bps) equals 1/100 of a percentage point.




Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

A credit rating is a measure of an issuer’s ability to repay interest and principal in a timely manner. The credit ratings provided by Standard and Poor’s, Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from AAA (highest) to D (lowest). Please see,, or for details.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.