Investors are increasingly allocating capital to Argentina’s local markets, capitalizing on the significant depreciation of the peso and the decline in domestic bonds to enhance their exposure to the nation’s assets.
Vontobel Asset Management has engaged in the acquisition of Boncer bonds, which are inflation-linked notes issued by the government. Meanwhile, Neuberger Berman has taken the opportunity to purchase non-deliverable forwards and local debt instruments. At JPMorgan Chase & Co, strategists are advising clients to consider investments in peso-denominated Bontam bonds that are set to mature in December 2026.
The purchasing activity follows the turbulence experienced by Argentine assets due to the Central Bank’s decision last month to cease the rollover of short-term notes referred to as LEFIs, resulting in a market saturated with pesos. In an effort to mitigate ongoing currency depreciation, policymakers increased reserve requirements on bank deposits. This action compelled domestic banks, significant purchasers of local bonds, to allocate a greater amount of pesos to the Central Bank. The consequence of that was an increase in yields on local debt.
“The central bank basically was forced to tighten liquidity,” stated Carlos de Sousa, a portfolio manager at Vontobel. “We believe that this somewhat chaotic transition away from LEFIs will ultimately be addressed, and local rates are expected to normalize as the market stabilizes.” The recent surge in yields on domestic bonds is noteworthy, particularly the interest rate on inflation-linked Boncer notes maturing in December, which escalated to 16.8 percent at the end of last month, up from 12.4 percent in late June. The yield has subsequently decreased to 16.6 percent.
Simultaneously, the peso has depreciated by over 10 percent since late June. The currency is currently facing downward pressure, influenced by a seasonal decline in agricultural exports and a prevailing sense of caution among investors as they approach the midterm elections, which are perceived as a critical assessment of President Javier Milei’s backing. It is trading at 1,332 per dollar.
“The recent adjustment has been significant, improving risk-reward for carry trades,” JPMorgan strategist Gisela Brant noted in a communication last week. Brant advised “taking a breather” on Argentine peso bonds in late June, pointing to increasing pressure on external accounts and uncertainty ahead of the midterm elections.
“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 stated last week, further noting her expectation for Milei’s party to perform well in the October vote. Nonetheless, the peso may exhibit further depreciation as it is still positioned below the upper limit of Argentina’s managed float of 1,456.
Despite the prevailing market conditions, Gorky Urquieta, co-head of Neuberger Berman’s emerging markets debt team, has increased exposure to Argentina after the sell-off in July. “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 stated.