Anxiety boils over for Argentina’s bond investors ahead of vote

Angst is spreading among holders of Argentina’s US$65 billion in sovereign bonds ahead of Sunday’s presidential election, with nearly every scenario pointing to further investment losses.

A victory by libertarian frontrunner Javier Milei could usher in untested policies to dollarise the nation’s stumbling economy. Pro-business Patricia Bullrich’s plan to lift capital controls would almost certainly spark another peso devaluation, while economy minister-turned-candidate Sergio Massa would spell continuity of left-wing policies investors see as failures.

For bondholders, that’s created something of a noxious mix. For weeks, most of Argentina’s foreign notes have lingered below 30 cents on the dollar, with surging yields that signal a tenth default is looming as major debt repayments resume next year.

“Argentina has become toxic,” said Diego Ferro, founder of M2M Capital in New York, who says he’s steering clear of the bonds for now. “You cannot make a rational investment thesis for the country. It’s more akin to gambling at this point.”

It’s easy to understand why investors are so uncertain: Argentina is on the brink of its sixth recession in a decade, the central bank is devoid of dollars and Argentines are suffering under the weight of runaway inflation.

The country’s bonds due 2030 have handed holders losses of 40 percent since they were issued during the latest restructuring agreement in 2020, according to data compiled by Bloomberg. That’s compared with an average 18 percent slump in Latin American sovereign bonds over the same period, the data show.

It marks a sharp departure from the enthusiasm seen just eight years ago, when large US-based funds rushed into Argentina on a bet the nation would turn business friendly under former president Mauricio Macri. After Macri failed to return the economy to growth, a surprise win by leftist Alberto Fernández in 2019 sent assets into a tailspin, generating massive losses for the nation’s biggest private creditors.

Here are three potential scenarios that investors are bracing for:

Milei wins big

Bond traders fear that prices for Argentine securities will spiral if Milei, a combative congressman often compared to Donald Trump, wins the October 22 vote outright — or takes a hefty percentage of votes ahead of a November run-off.

His hallmark proposal to wrestle high prices by ditching the peso for the dollar is a move that many economists say would stoke short-term inflation even further. How he would get that done without a legislative majority remains unknown.

“In a Milei victory, his lack of support in the Senate and Lower House provides gridlock against his more radical ideas,” said Trevor Yates, an investment analyst at Global X in New York. “If he truly wants to dollarise the economy, he will need to normalise fiscal and economic policy in the short-term.”

Bullrich faces off with Milei

Cutting the deficit and lifting capital controls are also part of former security minister Bullrich’s platform. Bonds could get a boost if Bullrich — many investors’ preferred choice — performs well enough on Sunday.

She’s run her campaign by touting an orthodox approach to combating inflation: slash public spending and stop printing pesos to cover the government’s bills.

“It’s more an issue of who has the best ability to implement the policies after the elections,” said Claudia Calich, the head of emerging-market debt at M&G Investments. There’s “a very long laundry list of things that need to be done by whoever gets elected.”

Massa makes It to run-off

Bond traders fear that prices for Argentina’s bonds will slump further should Milei face Massa in a November run-off. That’s because Massa is seen continuing his spending programmes financed through money printing, amping up inflation already surging at 138 percent.

“Milei versus Massa in a second-round run-off, I think, would be the worst of all possible scenarios,” said Patrick Esteruelas of Emso Asset Management. Massa’s spending tactics are “turning what was an already poisoned chalice for whoever ends up succeeding him, into an undrinkable chalice.”

Wild card vote

And with any election, there’s the chance for an unexpected outcome. Given Milei’s outperformance in August’s primaries, the chances of Milei getting knocked out for a Bullrich-Massa run-off are slim — but not impossible. In that event, investors see Bullrich as a likely winner, which may push bond prices higher.

“With elections right around the corner and sovereign prices where they are, you have to fasten your seatbelt and get ready for another Argentine roller coaster,” said Ray Zucaro, the chief investment officer of RVX Asset Management.