Fed effect: sharp collapse of Latin American sovereign bonds, how far will the bleeding go?

In dialogue with Ámbito, Leonardo Svirsky, stock market analyst, assured that “the rise in American bond rates obviously affects the entire region.” “Now the case of Argentina not only involves that side, but also the uncertainty of the electoral context. Here the market has been discounting a Milei – Massa ballotage and the truth is that it is not very good news. The panorama would be different if Together for Change reached the ballot.“.

Argentine bonds accumulate a strong downward trend during September. Thus, the greatest losses are recorded: the Global 2041 (-16.4%), the Global 2046 (-13.9%), and Bonar 2035 (-13.2%). ““Last week global bonds broke the $30 line for the first time since the end of June, a three-month low.”PPI said and noted that “some of it can be explained by international events.” In addition to, as we mentioned, local uncertainty regarding the economic direction after the general elections.

Fed, interest rates and fixed income

Following the Fed’s decision to maintain reference rates at the current level, the entity did not rule out a new increase before the end of the year and extending the contractionary monetary policy for longer than expected. This caused the 10-year paper yield to gain 10 basis points this Monday, after rising to 4.533%, its highest level since October 2007. Thus, a negative wave was generated in fixed income, which was also strongly evident in regional debt.

Alejandro Bianchi, founder of AsesorDeInversiones.comalso in dialogue with this medium, had explained what is happening at the moment with the yields of the different United States Treasury bonds. “The curve continues with a negative slope“, which means that “In the longer term, when it should yield more, it yields less. And that inverted curve gives a signal of a slowdown or possible recession”he explained.

What data is important to look at this week? a report of Adcap He stated that on Thursday the United States GDP for the second quarter will be known. “The market expects 2.2% growth for the US economy, and If the data were to be much higher, bets on an interest rate hike at the Federal Reserve’s November meeting could increase. If, on the other hand, GDP grows well below 2.2%, the Fed could leave interest rates at the same level.”

How it impacts Argentine debt

For Martín Polo, Cohen’s chief strategist“to the most adverse international scenario for emerging markets” is added “the deterioration of public accounts, driven by the fiscal stimulus plan that the government is implementing”. Thus, he highlighted that sovereign bonds in foreign currency registered a fall of 5.7% during the last week.

“This decline was manifested in a similar way in both international legislation bonds and local legislation bonds. The parities were reduced to 31%, and the country risk increased 204 bp, closing the week at 2,375 bp, its highest level since early June. So, Since the PASO, the bonds accumulate a drop of 13%although they maintain a profit of 15% so far this year,” he explained.

“The combination of external noise and high domestic uncertainty is proving too heavy for domestic assets and thus it extends the weakness since investors remain more inclined towards prudence and capital preservation while waiting for a friendlier and clearer outlook to resume betting,” Gustavo Ber explained.

“It happens that the results of 22-O are anxiously awaited, or prolong the wait until the second round, to evaluate how the political map will be defined for the new management as well as the support that it will have to advance in the urgent implementation of a stabilization plan in search of correcting the imbalances, when it is feared that the latest measures will further increase the fiscal deficit and emissions,” the economist concluded.