There is increasing apprehension in the bond market regarding the potential fatigue of Argentines with President Javier Milei and his ambitious economic reform initiatives. Only six months following the unexpected triumph of Milei’s party in the midterm elections, concerns regarding his future have resurfaced, as recent polls indicate that his approval rating has reached its nadir since he assumed office nearly two-and-a-half years ago. In April, the approval rating of the libertarian president decreased to 35.5 percent, while disapproval rose to 63 percent, as reported. The figures were recorded at 44 percent and 51.6 percent, respectively, at the beginning of the year. Sovereign local-law dollar notes maturing in October 2028 currently yield 8.3 percent, representing a substantial 360 basis points above the yield of comparable bonds maturing in October 2027. The expense associated with insuring against default in Argentina exhibits a comparable trend, escalating as the timeline extends beyond the upcoming election.
For investors, the concern lies in a potential reversion to policies perceived as less conducive to fiscal discipline, market accessibility, and private investment. “Electoral risk is evident across the curve, and the 2028 bond in particular is being dragged by that,” stated Alejo Costa. The risk in local markets is referred to as ‘Kuka,’ a term that combines the surname of two former presidents, Kirchner, with the Spanish word for cockroach, ‘cucaracha.’ The discussion centers on the interventionist and populist policies that have characterized the last twenty years, encompassing tighter currency and capital controls, regulated prices, increased public spending, and a more unpredictable policy framework. “I believe the Kuka risk is zero,” stated Economy Minister Luis Caputo to investors on Tuesday. “There is no danger of returning to the past.” However, the market presents a contrasting perspective. The elevated premium that investors are seeking to maintain exposure beyond Milei’s current term is also evident in inflation-linked peso bonds. This month, the curve has experienced a notable steepening, as inflation-linked bonds maturing in June 2028 have risen from 5.5 percent to 7.9 percent over the past 30 days.
In contrast, the bonds maturing in June 2027 are yielding a negative real rate of 1.2 percent. “Polls that were somewhat worse for Milei started to come out on average, and the consensus began to shift in the direction that Milei’s approval is deteriorating,” Costa stated. The political and electoral dynamics are not the sole contributors to this risk, as sovereign debt obligations are set to escalate between 2027 and 2033, compounded by increasing electoral uncertainty in the US, which currently underpins support for Argentina’s government and its bonds. Public support for Milei has been diminishing in the early months of the year, as significant segments of the economy, including manufacturing, retail, and construction, do not align with the recovery in exports following the recession of 2023 and 2024. “People have started to focus on the election because they are worried that the economy is not growing,” stated Miguel Kiguel. “While there is potential for improvement, the critical inquiry remains whether the rate of such improvement will suffice to alter public sentiment.” Argentina experienced a month-on-month contraction in economic activity of 2.6 percent in February, marking the most significant decline in nearly five years, according to the latest available data. Inflation persists at elevated levels, as consumer prices increased by 32.6 percent in March compared to the same month in the previous year.
An index measuring voter confidence in the government, as compiled by Torcuato Di Tella University, declined for the fifth consecutive month in April, hitting 2.02 points on a scale of five. “We know that the last months were hard,” Milei stated in a post on X at the beginning of April. “That is the reason we are requesting patience.” This represents the appropriate trajectory. Altering it would signify dismantling the progress that has been made. Credit default swaps suggest a five-percent risk of default over the next year; however, this figure escalates to 22 percent over three years and approaches 60 percent over the next decade, based on calculations from Max Capital and Portfolio Personal Inversiones. “All of this is being driven to a large extent by the secondary effects of the economic transition,” stated Pedro Siaba Serrate. “We are observing a distinctly uneven economy, characterized by robust performance in primary-product exports that positively influences the federal level, while concurrently experiencing minimal activity in sectors concentrated in Greater Buenos Aires, which tend to be more labour-intensive.”