Until not long ago, The Government made a decision that could be risky: offer instruments tied to the dollar, in an attempt to contain post-election devaluation expectations and decompress the spot exchange rate, and, at the same time, trying to moderate Treasury intervention.
In the last debt tender in September, amid strong demand for hedging through futures, the Ministry of Finance decided to offer three bonds that mature at the end of October (D31O5), November (D28N5) and December (TZVD5). The result was as expected: the amount of dollar-linked bonds represented 54% of what was placed, while 46% was for letters and capitalizable bonds at a fixed rate. (In this last case, it is worth noting that there was no demand for bonds at a fixed rate for more than one year).
According to market data, the Treasury accumulates maturities in linked dollars for this month, the equivalent of $3.2 billion, and accumulates until December about US$8,498 million. ¿Does Bessent’s announcement change perspectives?
Additionally, the BCRA had “firepower” for around US$7,000 million extra in linked dollar bonds that it could continue selling in the coming weeksif I had desired. The risk of offering linked dollars is always the fiscal cost that would entail covering the difference in the event of devaluation, the same thing that happens when the BCRA sells futures.
It is worth noting that in the erratic day on Thursday, prior to the announcement, devaluation expectations fell with the decline in futures. The market priced a wholesale exchange rate at $1,576 by the end of the year. The operated volume was u$s1,489 millionabove the previous day where there was official intervention to anchor the expectations of a regime change.
Is linked dollar debt a problem or not, after the intervention of the US Treasury?
The only certainty there is is that until the October elections, the strong support of the US implies a ratification of the exchange rate bands. But the doubt of the operators falls after the elections.
“The reality is that we do not know if US support is unconditional. The joint strategy of the US Treasury and the Government is to give credibility to the scheme until October, and then depending on the result in October, recalibrate. Because it is not the same whether the Government obtains a decent result in or if it takes a beating. Far from what they believe, this support favors them electorally, for me it complicates them because it shows a weak government that permanently needs bailouts. So, I would not take it for granted that the exchange rate scheme is maintained after October,” said economist Federico Machado, in dialogue with Scope.
However, he added: “If they have a good result, there is a very strong strength between the swap and the support in the exchange market that we do not know what magnitude it will have, if it is a one-time operation or it will be systematic. In the scenario that they have a decent or better electoral result, it seems to me that the band scheme is maintained and in that sense, linked dollar debt can even be beneficial because you will end up paying lower rates than fixed rate debt, Lecap and Boncaps, etc..
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On the other hand, Alejandro Fagan, Balanz strategist, added that although there was a considerable increase in dollar-linked debt, “the current stock is well below the levels observed in 2023, when a significant portion of the debt was indexed to the evolution of the exchange rate or inflation.”
“As the official exchange rate adjusts upward, both the Treasury and the BCRA face an increase in their accounting losses derived from these instruments. In the case of the Treasury, The maturities will be met with own pesos (which it has and have increased after sales in the MULC), while in the case of the BCRA, the losses generated by its positions in futures (a position that is currently around US$7,000 million) will imply a greater need for monetary issuance. In this context, The main risk does not involve the nominal payment capacity, but for him quasi-fiscal and monetary cost that could arise from a more accelerated devaluation than expected given that it is expected that at the maturity of the instruments those pesos will demand dollars,” he explained.
Analyst Federico Glustein also contributed his views on the matter. “Although the majority maturities are on a close date, such as the end of October, having maturities of US$1.3 billion until June with linked dollars is a way of having exchange rate microtensions almost every next month, so the Government will have to be lucid to avoid unnecessary exchange appreciations, buying dollars at key moments.”
The first question that arises on this topic is: Would US support provide greater certainty that linked dollar debt can be rollable and even paid to holders, without any problem? To this question, Glustein responded: “It depends on several issues. First, the demand for the execution of the swap and at what cost it will be allowed to know if the devaluation pressure can be a problem. But if it devalues it would have more coverage, although it could have to pay more taxes in pesos per linked dollar.”
Looking ahead to the coming weeks, the calendar marks two key milestones for the Ministry of Economy: the debt tenders planned for the October 15before the elections, and for the 29 of the same monthalready with the electoral result on the table. A part of the market remains euphoric and “long pesos”, although caution prevails: for now, there are more questions than certainties. However, after the historical event that occurred on Thursdaythe stage showed that new surprises can still occur.
Source: Ambito
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