Argentine enterprises and investors are incurring additional costs to acquire dollars in a strategic maneuver to circumvent the currency controls imposed by President Javier Milei. While individuals encounter reduced limitations in the current environment, corporations continue to navigate obstacles related to the acquisition and disposal of U.S. dollars as Milei endeavors to stabilize the peso against significant fluctuations. In an effort to circumvent regulatory constraints, companies are acquiring short-term corporate, provincial, and sovereign bonds denominated in pesos, thereby securing coupon and principal payments in dollars. The increase in demand has led to a significant decline in yields, resulting in certain Argentine corporate and provincial dollar bonds being issued at borrowing costs that are lower than those of benchmark US Treasury bonds. In certain instances, yields are negative, suggesting that the main objective is not to retain the assets until maturity but rather to obtain liquidity in the form of dollars.
The underlying distortion is a result of a policy framework that persistently restricts access to dollars. In anticipation of the midterm elections scheduled for October, Argentina’s Central Bank has implemented a cross restriction. This measure curtails the capacity of companies to transition between the official foreign-exchange market and the two primary securities-based avenues for obtaining dollars. Prior to the implementation of the new regulation, it was common practice for investors and companies to acquire securities in pesos and subsequently liquidate them for dollars. This enabled them to lawfully exchange pesos for dollars at an implied exchange rate that was less favorable than the official rate. The cross restriction is significant for firms reliant on the official exchange market to settle import invoices or service external debt. According to the regulation, a firm that utilizes the securities route for dollar exchanges faces the potential consequence of being barred from that market for a period of 90 days. Acquiring short-duration US dollar bonds presents a solution by facilitating access to dollars while maintaining the official channel’s availability.
Yields on specific instruments have entered negative territory, as evidenced by Pan American Energy LLC’s note maturing on March 2, which has returned minus 4.5 percent, alongside Grupo Financiero Galicia SA’s paper due December 30, currently at approximately minus two percent, based on data. Pampa Energía SA’s bond maturing on March 26 is approaching a return of 1.7 percent, whereas the notes issued by Córdoba Province, set to mature in October, are associated with a negative yield of 2.5 percent, according to the data. Issuers such as Pampa and Genneia SA engaged in debt buybacks this month, following a decline in yields on certain short-dated debt instruments. “This is linked to the restrictions,” stated Diego Mendez. “Investors acquire short bonds, and upon receipt of the dollars, they retain them on their balance sheets. “They pay an extra premium because what they want is the dollars,” he said. Demand is most robust in scenarios where firms pursue dollars to mitigate their currency exposure risks. “There’s pressure at the very front end because hedging is done with actual dollars,” Mendez stated. Further along the Argentine Treasury curve, yields persistently exhibit positive values, indicating that the recent movement does not signify a comprehensive re-evaluation of Argentine credit risk. Longer-dated bonds, including Grupo Galicia’s notes maturing in July, presently yield approximately 5.5 percent, based on data.
Argentina’s long-term sovereign bonds issued abroad, including notes maturing in 2035, yield over 9.8 percent, a figure that more accurately captures the risk assessment of global investors. A comparable premium is evident in the CCL rate, a free-floating exchange rate for investors that has recently traded above the Central Bank’s FX band. The band, initiated with a range of 1,000 to 1,400 pesos and subject to monthly adjustments, is poised for a more rapid expansion beyond its current one percent monthly rate starting in January. This change aligns with the Central Bank’s intention to index it to the current monthly inflation rate of 2.5 percent. The recent modifications on the front-end also present an advantage for issuers. Pampa, Genneia, and others in recent weeks have successfully repurchased outstanding debt at prices below the issue price, with the premium affecting buyers transforming into a discount for issuers aiming to retire liabilities ahead of schedule. “For local investors, investing in a US Treasury or an Apple bond frequently proves illogical – when factoring in taxes on foreign assets, FX controls, and broker fees, the net return may become negative, leading to a situation where all that cash ultimately seeks refuge in short-dated Argentine corporate and provincial bonds instead,” stated 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 stated.