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Argentine Bonds Forecast to Recoup Losses by Swap: Week Ahead
Bloomberg
January 19, 2010

By Drew Benson

Jan. 19 (Bloomberg) -- Argentine bonds, the worst- performing emerging-market dollar-denominated securities this year, will recoup losses as the government moves ahead with plans to restructure $20 billion of defaulted debt in February, according to JPMorgan Chase & Co.

The extra yield investors demand to buy Argentine bonds instead of U.S. Treasuries will fall to as low 6.31 percentage points from 7.35 points on Jan. 15, said Pierre-Yves Bareau, who helps manage more than $7 billion as the head of emerging-market debt at JPMorgan Asset Management in London. The spread had widened as President Cristina Fernandez de Kirchner sought to fire central bank President Martin Redrado over a government plan to use $6.6 billion of reserves to cover debt payments.

The gap "will recede," Pierre-Yves Bareau said in an interview. "We think it will go back to prior levels a bit before the restructuring."

Investors are growing confident Argentina will go forward with the proposed debt swap as Finance Secretary Hernan Lorenzino prepares to meet this week with holders of defaulted bonds in Italy, Germany and London. The transaction would enable Argentina to return to international capital markets for the first time since its 2001 default on $95 billion of debt.

Argentine bonds dropped 5.1 percent this month, the biggest decline in JPMorgan's EMBI+ index, as the government's battle with the central bank worsened. After Fernandez fired Redrado by decree on Jan. 7, the yield spread jumped from the 17-month low of 6.31 percentage points. A judge blocked the presidential order and Redrado has remained central bank president.

Spread Swells

Argentine bond yields posted their biggest weekly increase since September last week, with the spread over Treasuries swelling by 50 basis points, or 0.50 percentage point, on concern that various court rulings could delay the restructuring offer. Argentina's yield gap of 7.35 percentage points compares with 6.66 points for Pakistan, whose debt carries the same B- rating from Standard & Poor's.

Bonds sold by Argentina returned 133 percent last year while Pakistan's debt gained 147 percent, according to JPMorgan indexes.

Agnes Belaisch, a London-based emerging-market strategist at Threadneedle Asset Management Ltd., said the fight over central bank reserves was a "wake-up call for investors."

"It was a bad signal that I don't think the market will forget so quickly," said Belaisch, who forecasts Argentina's bond spread won't return to its Jan. 4 level.

'Assurance'

Argentina's government said in October it would make an offer to creditors who kept their holdings out of a 2005 restructuring that paid 30 cents on the dollar. Economy Minister Amado Boudou said Jan. 14 the government plans to finish the swap next month, helping push down the yield on Argentina's 7 percent bonds due in 2015 47 basis points to 12.19 percent.

"The market took some assurance from Boudou coming out to say that the exchange is still going forward," said Edwin Gutierrez, who manages about $5.5 billion of emerging-market debt, including defaulted Argentine bonds, for Aberdeen Asset Management Plc in London.

Gutierrez said he expects Argentine debt to rally ahead of the debt settlement, in which he plans to participate, and that the country may try to sell as much as $4 billion of bonds in overseas debt markets this year.

The following is a list of events in Argentina this week:

Event Date
Trade Balance (December) Jan. 22
Industrial Production (December) Jan. 22

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net

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