the mysterious graph of two bonds that anticipates what will happen

The Delphos experiment immediately refers us to the price and performance of two bonds. She don’t panic. One of these bonds adjusts its yield by the CER, an index that takes as a reference the inflation measured by the INDEC. In other words, this bond will pay the investor more if inflation is higher and will pay less if inflation is lower.

However. The price of the bond in the market tells us things. If the price rises because the bond is more in demand, then its yield will drop because it will have to be purchased more expensively and therefore the promised return will be lower. The reverse also applies.

The other bond, called dollar-linked, ties its performance (its Internal Rate of Return or IRR) to the evolution of the official exchange rate. As in the first case, if investors see that it is not a good idea to buy a security that will be tied to a variable such as the price of the official dollar, then the price of the bond will fall and the potential return will rise, since the bond may be purchased at a lower or cheaper price than at time one.

We are going to repeat the graph twice throughout the note. From the archeology of the trajectory of the two bonds, from the tracing of their route in the prices that have emerged in recent weeks, we can immediately know what the scenario, always theoretical, that paves the expectations of investors, many times, a kind of of self-fulfilling prophecy. That is, we analyze the implicit rates of real depreciation and use the comparison of instruments tied to the dollar and to inflation.

Is it convenient to invest the pesos in dollars, tie them to a linked dollar, or in any case will it be more business to stay close to some issue or bond that pays for the inflation measured by the Indec via CER?

First you have to look at the graph. The two references are simple. The orange curve (in the graph below) shows the yield or IRR on the left axis of the TX23 bond. The tour is from the last five months. As said, we try to understand if investors discount that the depreciation of the peso could equal or exceed inflation.

The TX23 is subject to the CER rate, which reflects the expectation of future inflation. In the illustrated graph, we see that the IRR of the bond, measured on the left margin, began to decline after the November elections of last year. Following the reasoning, there was a greater number of investors who bought this bond, the price rose, its yield fell. Thus, the market began to have higher expectations about a possible acceleration in inflation.

Now we follow the blue curve. This is the second bond, it is the TV23, (dollar-linked bond) that is usually quoted on the expectation of a devaluation of the local currency. In the exposed graph, it can be seen that its performance on the right side of the graph is not only lower than the other bond, but also that over the last five months it has registered a less significant drop, although a drop in the end. In other words, although the price of the bond has risen, it has done so to a lesser extent and from a lower base of comparison. The spread, the difference between one bond and another, begins to fall, since the market stopped assigning such an important degree of occurrence to a significant devaluation, while it began to contemplate inflation with greater power.

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According to analysts, if you compare what each bond marks on their respective axes, what you should see is an adjustment, from a “pricing” of 6% real annual implicit depreciation to one of 1%. Therefore, what investors think is that, although the devaluation continues, it is likely that inflation has gained strength and in comparative terms, for the moment, it ends up being more “business” for the investor. Faster inflation than the dollar, for now, although the BCRA seems to be slowly accelerating the rate of exchange depreciation.