The other side of jump in debt prices in pesos at a fixed rate is he market optimism regarding the deceleration path of the inflation. The expectation implicit in the value of public securities continues to decline and It is already approaching an average of 2% per month for the period from now to legislative elections.
Embarking on bets on the “carry trade”, Investors buy the scenario of a strong slowdown in inflation during the coming months promoted by the Government. Thus, after the signal sent by the Ministry of Economy on Friday by not including any fixed rate instrument in this Tuesday’s call for bids, the already intense demand for Lecap and Boncap during this Monday’s round.
The increases were widespread throughout the fixed rate curve, but The main jumps occurred in the longest stretch, where there were increases of up to 3%. This reinforced the inversion of the curve: short letters yield more than long ones. This reflects that investors expect inflation to continue to decline and, within that framework, that rates will follow a downward path in the future.
Inflation: what path emerges from market prices?
Ultimately, these movements generated a sharp drop in inflation expectations implicit in the prices of sovereign securities in pesos. It’s about the call “breakeven inflation”which arises from comparing the prices and returns of fixed-rate instruments with those indexed by CER and establishing as the “equilibrium point” the CPI level necessary for both investments to “come out tied.”
In dialogue with Scopethe economist Salvador Vitellifrom Romano Group, calculated that “breakeven inflation” fell to one point and It was about to touch 2% per month as an average between now and the mid-term elections (until now it was around 2.5%). Specifically, with the values in force at 3:00 p.m. on Monday, he estimated that the implicit expectation was 2.3% for October, 2.2% for November and December; 2.6% for January, and 2.1% from February to October 2025.
The numbers show a clear downward trend in investor expectations. and they trace a much more optimistic scenario than the one proposed by the city’s consultants in the last Market Expectations Survey (REM) of the BCRA. The median of the last REM projections (collected at the end of September and published at the beginning of October) marked an oscillating path for the CPI in a range of between 3.6% and 3% between now and March 2025.
The truth is that, according to different traders, there were considerable increases in both CER and Lecap and Boncap, which is why there were significant oscillations in the breakevens throughout the wheel. In any case, the coincidence is that optimism invaded the investor mood and resulted in these price movements.
Caputo’s signal
Although the trend had been developing in recent weeks, the truth is that this Monday appetite finished skyrocketing after the signal sent by Luis Caputo to the market. On Friday, once the operation was closed, Economía published the call for the debt tender in pesos this Tuesdayin which did not include any fixed rate instruments, which were already in high demand due to “carry trade” bets. Instead, it only offered four inflation-linked bonds (Boncer).
In the city, the decision not to include Lecap or Boncap was interpreted as a message that the Government would not validate the rates that were in the secondary market at the end of last week, even though they had already compressed enough. Because? “Because they want to give the signal that inflation will continue to decelerate and that, then, they will return to a fixed rate when yields decrease even more,” an operator told Scope. The market responded to that stimulus.
“As nothing at a fixed rate was offered in the tender, the market today went out to look for those instruments in the secondary market, which caused the rise. This is what the Government was looking for. Since, as it is a small maturity, I wanted the Lecap and Boncap rates to compress as much as possible to have a reference level in the upcoming tenders that are larger ($8 billion expires in November). In this way, the long Lecap and Boncap marked increases of almost 3%,” highlighted Nicolás Cappella, sales trader at IEB.
And he added: “On the side of the CERwe had started to notice a little more interest on Friday. Today it looked much more noticeable.. Which is also logical since, Faced with such a large increase in the fixed rate, the CER bonds are becoming outdated. To put in context, a spread of CER+13% is what we had at the levels of (Martín) Guzmán’s resignation. Therefore, the CER curve, for the medium term, we believe offers value at these levels.”
Source: Ambito
