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Argentina's Inflation-Linked Peso Bonds Decline on Data Concern
Bloomberg
May 13, 2008

By Andrea Jaramillo

May 12 (Bloomberg) -- Argentina's inflation-linked peso bonds dropped on concern the government will keep underreporting inflation with a new consumer price index.

``The market continues to punish Argentine bonds given the manipulation of the inflation data,'' said Juan Ignacio Di Santo, an analyst at Puente Hnos Sociedad de Bolsa SA in Buenos Aires.

The yield on Argentina's 2 percent inflation-linked peso bonds due in February 2018 rose 15 basis points, or 0.15 percentage point, to 10.9 percent at 6:24 p.m. in New York, according to Citigroup Inc.'s unit in Argentina. The bond's price dropped 1.097 centavo to 105.078 centavos per peso.

Consumer prices rose 0.8 percent in April, the National Statistics Institute said on May 9. ``True inflation'' in April is estimated at between 1.5 percent to 2 percent, Carola Sandy, a Latin America economist at Credit Suisse Group in New York, wrote in a report today.

Argentina's inflation reports have been questioned by economists, opposition leaders and the International Monetary Fund since President Nestor Kirchner changed personnel at the institute in January 2007. Both Kirchner and his wife, Cristina Fernandez de Kirchner, who succeeded him as president in December, say the inflation data is accurate.

Cabinet Chief Alberto Fernandez said on May 7 that the government plans to introduce a new index that better measures Argentine consumption since an economic crisis in 2001, when the country defaulted on $95 billion in bonds.

`Credibility'

``We do not expect that the new consumer price index will restore credibility to Argentina's inflation data,'' Sandy wrote in her report. ``The political cost of acknowledging that consumer price index inflation is much higher than currently reported is probably too high for the government to be more forthcoming.''

Argentina's peso was little changed, at 3.1763 per dollar from 3.177 yesterday.

Colombia's peso advanced for a third day, strengthening 0.1 percent to 1,781.8 per dollar, according to the Colombian foreign-exchange electronic transactions system, known as SET- FX.

Colombian Finance Minister Oscar Ivan Zuluaga said on May 6 that the government plans to use derivatives contracts to convert as much as $2 billion of international debt into peso obligations to take advantage of the peso's five-year rally. On May 7, the government published the details of its plan, indicating it will use swaps to hedge loan payments with the World Bank that mature through 2023.

Swaps

``After realizing the government will take out swaps in a much more limited and paused manner than initially expected, the market continues to adjust its positions,'' said Guillermo Puentes, head currency trader at HSBC Holdings Plc's local unit in Bogota.

The yield on Colombia's benchmark 11 percent bonds due July 2020 rose 7 basis points 11.13 percent, according to Colombia's stock exchange.

Chile's peso rose 0.3 percent to 467.34 per dollar. The currency's 4.3 percent decline in the past month is the biggest among the six most-traded currencies in Latin America.

The central bank has bought $50 million daily in the currency market since April 14 in an effort to weaken the peso and bolster exports. Today, it purchased dollars at an average price of 469.79 pesos.

The yield on Chile's 6 percent bonds due in March 2017 rose 9 basis points to 7.19 percent, according to Chile's Commerce Exchange.

Peru, Venezuela

Peru's sol dropped 0.3 percent to 2.765 per dollar. The currency has fallen 1.9 percent since April 10, when policy makers raised the reserve requirements on non-residents' bank accounts to 120 percent from 40 percent to slow the currency's appreciation. The central bank last purchased dollars on April 17, buying $13 million to stem gains in the sol.

The yield on Peru's 8.6 percent sol-denominated bonds due in August 2017 rose 1 basis point to 6.42 percent, according to Citibank Peru.

Venezuela's bolivar fell 4.4 percent to 3.55 per dollar in the unregulated market, traders said. The government pegs the currency at an official exchange rate of 2.15 per dollar under restrictions imposed in 2003. Venezuelans turn to the parallel market when they can't get approval from the government's Foreign Exchange Administration Commission to buy dollars at the official rate.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: May 12, 2008 18:35 EDT