The sell-off in Argentina’s debt, in light of a significant shift in expectations ahead of the upcoming presidential election next year, has been deemed excessive by Morgan Stanley. The country’s sovereign bonds currently imply a probability range of 41 percent to 52 percent for the bank’s bear-case scenario, an increase from the previous range of 11 percent to 20 percent observed three months ago, as noted by strategist Simon Waever in a report released on Tuesday. That scenario, he states, presumes a two-thirds probability that the South American nation navigates its challenges successfully and a one-third likelihood of default.
“Pricing already close to 50 percent of the bear case outcome for most bonds a little less than a year out from the actual elections is not warranted,” Waever said. That “looks like an overshoot driven by positioning unwind, even if data and domestic sentiment have been weaker than anticipated.” Argentina’s dollar bonds have declined approximately 14 percent since the end of July, marking the most significant downturn in emerging markets, as investor apprehension regarding President Javier Milei’s re-election prospects intensifies.
Those contending that the fears have been exaggerated have thus far faced opposition from the persistent fragility in the nation’s debt, which has deepened following the setbacks experienced by right-wing allies of Milei in the Brazilian presidential elections and the US midterms. The additional yield that investors require to hold Argentine debt compared to US Treasuries has increased significantly, more than doubling from its low in July to surpass 900 basis points earlier this month.
This figure is nearing the 1,000-basis-point mark, a level commonly linked to distressed debt, as indicated by a JPMorgan Chase & Co index. While Morgan Stanley doesn’t anticipate bonds to “entirely retrace” the recent weakness, Waever perceives the long end of the curve, including notes maturing in 2041, as presenting a “attractive” risk-reward. Argentine local markets have been shuttered this week in light of Pope Leo XIV’s visit to the country, with a reopening anticipated on Thursday.
