Sovereign bonds between two fires: fixed income in the midst of Javier Milei’s conflict with governors

Given the conflict between the provinces and the National Government for Co-participation funds, Investors once again plunge into uncertainty as the dispute worsens, which was expected to be resolved shortly after the weekend. Thus, this Tuesday, bonds denominated in dollars fall for the second consecutive day, largely dragged by this political crisis and that makes investors doubt what the outcome of this novel will be and what its impact will be on fixed income in general.

Thus, the Government’s bid with the provinces led to sovereign and provincial bonds in dollars. On the one hand, Treasury bonds lost 1.4% this Monday, although they have accumulated a gain of 9.8% so far this month and 14.8% so far this year. On the other hand, the provincial ones registered a drop of 0.8%, among which the decrease in the bond of the Province of Buenos Aires to 2037 stood out, which lost 3.0%, and the guaranteed Chubut to 2023, with a drop of 1.1%.

In this context, the icing on the cake came from La Rioja, which announced the beginning of a restructuring process with the holders of its 2028 dollar bond. In this way, the province defaulted on payment of US$26 million corresponding to February 24.

For the remainder of the year, that jurisdiction has maturities in August for US$51 million, while the total defaulted capital is equivalent to US$318 million. And the case of La Rioja could trigger a domino effect with other provinces, which, at not being able to meet their obligations due to the “suffocation” of the Governmenteven with the implications that this entails for their credit status, join this trend.

And this situation would have a full impact on fixed income, where there is already little appetite for sovereign debt and rejection of sub-sovereign debt.

Provincial bonds: the losers of the conflict

This is warned by economist Federico Glustein, who believes that this scenario is even more complicated at a time when many provinces need to go into debt “or issue some type of financial instrument” to stay afloat over time.

Glustein raises a dichotomy in this whole situation, as he points out that, on the one hand, national sovereign bonds will have a solid return supported by “fiscal sustainability”, while Provincial ones may face problems because they are more linked to the economic growth of a certain regionproductive factors and the national situation.

And he warns that the latter would be the most affected by the bidding with the Nation, while the Milei Government would come out well by showing off the reduction in the fiscal deficit explained by cuts to the provinces.

What reading does the market make of the conflict?

The current perception in the market is that some type of rapprochement or solution between the Government and the provinces is expected to avoid major consequences before Wednesday. “Specifically, Chubut’s situation seems complicated, since it needs to generate income, but it is assumed that an intermediate solution will be found to mitigate the tension,” he analyzes. Gustavo Neffaeconomist and partner at Research for Traders.

The analyst maintains that in the optimistic scenario, where an agreement is reached or tensions do not worsen, “the market will focus on more relevant aspects, such as the appreciation of the exchange rate, the arrival of funds for investments, positive fiscal evolution and monetary order“, very much in line with what was outlined by Glustein. Neffa maintains that these factors are “more important” for investors.

However, if the initial positions of the parties in conflict are maintained and a successful outcome is not reached, Neffa “anticipates a significant impact on provincial bond prices, affecting all provinces, especially the smaller ones“He adds that the situation in La Rioja raises fear of a restructuring of provincial debts,”which could have an effect on sovereign bond prices“.

La Rioja, a trend for the other provinces?

For Juan Pedro Mazza, Cohen’s strategist, the tensions between the Nation and the Provinces have already entered dangerous terrain. “The conflict is bad for all parties and we hope that its impact will be felt in national and provincial fixed income,” he warns.

This is because the lower funds complicate the payment capacity of the provinces, which were already coming from a fiscally complicated 2023,”Therefore, it is possible that several jurisdictions follow the path of restructuring that La Rioja took.“.

Mazza explains that, as a result of the conflict, the national government showed its governance challenges, which are also exacerbated by the “strong adjustment” economic program and by the aggressive communication of President Javier Milei. For the strategist, “it is a very bad sign that twenty-three of the twenty-four provincial leaders, including Jorge Macri, spoke out in support of Chubut.” Likewise, to this is added that the Justice determined this Tuesday that the debt must be refinanced and the funds from the co-participation to Chubut.

So things, the prospects of being able to approve reforms in Congress are greatly weakenedsomething that the market is looking forward to in order to continue with the generalized increases in fixed income.

The strategy to follow

Finally, Javier CasabalFixed Income Strategist at Adcap, contributes that, in principle, the default of La Rioja “It shouldn’t affect, but certainly begins to show that “All provinces are under financial stress.” and that not all of them will behave in the same way.

One of the most relevant issues regarding this, according to Casabal, is what is the will to return to the market for each of the provinces. To which he replies that “perhaps, La Rioja is one of those that was already furthest from the market“This is because the very issuance of the quasi-currencies is, in some sense, something very similar to a default in the sense that debts in pesos begin to be canceled “with a paper that is not pesos,” he assures.

Although some of the recent news supports the optimistic outlook for sovereign debt, Adcap prefers to take profits and “move to defensive positions less exposed to implementation risk“. That means staying in ARGENT 2038 or 2035 instead of 2030“go from Provincial Bonds and in Pesos to Bopreal”, one of the few that we find cheap now due to technical flows.

The strategy coincides with that proposed by Cohen’s strategist, who concludes that the move consists of reducing positions in the most aggressive bonds (Bonares, GD30, GD29 and GD35) that come from a strong rally “in favor of more defensive options such as the GD38 or Bopreal Series 1“.