Argentines pile into short-term bonds to dodge FX controls

Argentine businesses and investors are paying a premium to stock up on dollars in a creative effort to sidestep President Javier Milei’s currency controls.

Although individuals face fewer restrictions today, companies still confront barriers around buying and selling greenbacks as Milei tries to prevent major swings in the peso. To get around the controls, firms are buying short-term corporate, provincial and sovereign bonds using pesos to receive coupon and principal payments in dollars.

The surge in demand has reduced yields so much that some of Argentina’s locally issued corporate and provincial dollar bonds come with lower borrowing costs than benchmark US Treasury bonds. In some cases, yields are negative, indicating that the primary goal isn’t to hold the assets to maturity but access dollars.

Behind the distortion is a policy framework that continues to stifle access to dollars. Argentina’s Central Bank, ahead of the midterm elections in October, imposed a so-called cross restriction that limits companies’ ability to switch between the official foreign-exchange market and the two main securities-based routes to acquire dollars. Before the new rule took effect, investors and companies routinely bought securities in pesos and sold them for dollars. This allowed them to legally convert pesos into dollars at an implied exchange rate weaker than the official one.

The cross restriction matters to firms that need the official exchange market to pay import invoices or service external debt. Under the rule, a company that exchanges dollars using the securities route risks losing access to that market for 90 days. Buying short-duration US dollar bonds offers a workaround by providing access to dollars while keeping the official window open. 

That has turned yields on certain instruments negative, with Pan American Energy LLC’s note due March 2 returning minus 4.5 percent and Grupo Financiero Galicia SA’s December 30 paper at around minus two percent, according to data compiled by Bloomberg. Pampa Energía SA’s March 26 bond is nearing a 1.7 percent return, while notes issued by Córdoba Province due in October come with a negative yield of 2.5 percent, the data show. Issuers including Pampa and Genneia SA this month bought back debt after yields on some of their short-dated debt fell even further.

“This is linked to the restrictions,” said Diego Mendez, team leader for corporate credit at local brokerage PPI. “Investors buy short bonds and when the dollars are paid, they keep them on their books. They pay an extra premium because what they want is the dollars,” he said. Demand is strongest in cases in which companies seek dollars to hedge their currency exposure. “There’s pressure at the very front end because hedging is done with actual dollars,” Mendez said.

Further out the Argentine Treasury curve, yields remain firmly positive, suggesting that the recent trend doesn’t mark a broad re-rating of Argentine credit risk. Longer-dated bonds, such as Grupo Galicia’s notes maturing in July, currently yield about 5.5 percent, according to data compiled by Bloomberg. Argentina’s long-term sovereign bonds issued abroad, such as notes maturing in 2035, yield over 9.8 percent, which more accurately reflects global investors’ risk assessment.

A similar premium is showing in the CCL rate, a free-floating exchange rate for investors which recently recently traded above the Central Vank’s FX band. The band, launched with a range of 1,000 to 1,400 pesos and monthly adjustments, is set to expand faster from its current one percent monthly pace in January, when the Central Bank plans to index it to monthly inflation, now at 2.5 percent.

The recent changes on the front-end also come with a benefit for issuers. Pampa, Genneia and others in recent weeks have been able to repurchase outstanding debt below the issue price, with the same premium that’s hurting buyers turning into a discount for issuers looking to retire liabilities early.

“For local investors, going into a US Treasury or an Apple bond often makes no sense – once you add taxes on foreign assets, FX controls and broker fees, the net return can turn negative, so all that cash ends up chasing short-dated Argentine corporate and provincial bonds instead,” said Juan Manuel Pazos, chief of strategy at local brokerage One618. 

“Having these bonds yield negative returns or below a US Treasury isn’t so irrational when the alternative is leaving dollars at zero percent in a savings account — any positive yield on a local bond looks better than that,” Pazos said.