Vontobel, Neuberger see opportunity in Argentina local bond rout

Money managers are piling into Argentina’s local markets, seizing on the steep sell-off in the peso and domestic bonds to increase exposure to the country’s assets.

Vontobel Asset Management has been buying Boncer bonds — inflation-linked notes issued by the government — while Neuberger Berman has snapped up non-deliverable forwards and local debt. At JPMorgan Chase & Co, strategists are urging clients to bet on peso-denominated Bontam bonds maturing in December 2026.

The buying comes after Argentine assets were roiled by the Central Bankk’s decision last month to stop rolling over short-term notes known as LEFIs, which left the market awash in pesos. To stem further currency weakness, policymakers hiked reserve requirements on bank deposits, a step that forced local lenders — major buyers of local bonds — to park more pesos at the Central Bank. That, in turn, pushed up yields on local debt.

“The central bank basically was forced to tighten liquidity,” said Carlos de Sousa, a portfolio manager at Vontobel. “We take the view that this not-so-orderly transition away from LEFIs will eventually be resolved, and local rates should normalise once the market settles.”

Yields on domestic bonds have spiked, with the interest rate on inflation-linked Boncer notes maturing in December jumping to 16.8 percent at the end of last month from 12.4 percent in late June. The yield has since edged lower to 16.6 percent.

At the same time, the peso is down more than 10 percent since late June. The currency — also pressured by a seasonal dip in farm exports and investor caution ahead of midterm elections seen as a test of President Javier Milei’s support — is trading at 1,332 per dollar.

“The recent adjustment has been significant, improving risk-reward for carry trades,” JPMorgan strategist Gisela Brant wrote in a note last week.

Brant had recommended “taking a breather” on Argentine peso bonds in late June, citing mounting pressure on external accounts and pre-midterm election uncertainty.

“Elections continue to pose uncertainty for markets, but at current levels of rates and FX, some of the risk premium appears to be already factored into prices,” she said last week, adding that her expectation is for Milei’s party to perform well in the October vote.

Still, the peso could potentially weaken further as it remains some way from the upper bound of Argentina’s managed float of 1,456.

That hasn’t stopped Gorky Urquieta, co-head of Neuberger Berman’s emerging markets debt team, from adding Argentina exposure following the July sell-off.

“If you enter these levels within the band, even if it goes back to the top, it’s still a positive return in USD,” Urquieta said.