Yields on the Argentine government’s short-term notes soared to record highs Monday, just two days before the Treasury faces an auction that will help gauge investor appetite ahead of crucial midterm elections in October.
The yield on Lecap notes maturing September 12 jumped to 65 percent, its highest level since the instrument was first issued a year ago and up from 46 percent at the start of August, according to data compiled by Bloomberg. Interest rates on other Lecaps also jumped.
The sharp increase in borrowing costs comes as the government prepares for a peso debt auction on Wednesday when it will attempt to roll over around 23 trillion pesos (US$17.4 billion) in maturities, equal to about a third of all the money circulating in Argentina’s economy. It also reflects a liquidity crunch in the local financial system following the central bank decision to increase reserve requirements, a move aimed at easing pressure on the exchange rate and containing inflation.
Argentina’s currency lost over 12 percent in July, its worst performance since President Javier Milei devalued the peso at the start of his administration. Rising dollar demand coincided last month with a seasonal decline in agriculture export flows, a top source of greenbacks in South America’s second-largest economy.
Throughout July, the government had been injecting pesos into the economy while building up international reserves to meet targets under its US$20-billion program with the International Monetary Fund. At the same time, dollar demand from the private sector intensified, with businesses seeking a hedge ahead of the October midterm elections. Investors also are closely watching key provincial elections in Buenos Aires on September 7.
“The system is under strain again. Rates are under pressure because banks no longer have a liquidity window,” after the latest Central Bank’s measures, said Juan Manuel Pazos, economist at local consulting firm One618. “The issue stems more from a flaw in the design of monetary policy than from any electoral risk perceived by investors.”
As economists already see July monthly inflation mildly accelerating, the market concern is that if the Milei administration can’t rollover all the notes, it could suddenly inject liquidity into the banking system, which could spur further price hikes that run the risk of denting the libertarian’s approval ratings.
Finance Secretary Pablo Quirno said in a post on X on Monday that the government will auction peso-denominated bills and notes linked to inflation and the exchange rate on Wednesday.
by Ignacio Olivera Doll, Bloomberg
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