This week, bonds that adjust for inflation (CER bonds) had a superlative performance. As of Thursday, these bonds accumulated a gain of between 0.7% and 14.7%, where the longer-term bonds (CUAP, PARP, TZX28 and DICP) stood out.
Furthermore, considering that cash with settlement remained practically stable in the week, the returns expressed in hard currency are just as surprising.
Beyond this rebound, the reality is that the CER bonds came from several months with low yields. As we can see in the graph below, the yields of CER bonds have been climbing since the beginning of the year, despite the sharp drop in country risk.
CER Bonds Against Country Risk in 2024
Nobility oblige, the combination of dollar bonds yielding 40/20% in dollars and peso bonds adjustable for inflation at negative rates as we saw in January was not sustainable. It could only be explained in a context of exchange restrictions combined with a strongly negative interest rate due to the expectation of high inflation rates. after the devaluation of December 2023. Based on this conclusion, at PPI we had been insisting that dollar bonds were the most attractive assets to invest in 2024 assuming an optimistic macroeconomic and financial scenario.
Now thinking about the future: Are CER bonds still at attractive valuations after the rally? Or, on the contrary, are dollar bonds the ones that are cheaper again? What positioning should I have currently? Let’s see:
CER-adjustable bonds maturing from 2026 currently yield between 9.5% and 11.5% real annually. To put it in perspective, a DICP that currently yields 9.7%, returned -3% in January 2024 and the median yield during 2016 – pre-2019 was 4.8%. Therefore, we can conclude that current valuations are attractive in historical terms. However, to answer whether dollar bonds are preferable, we propose a scenario analysis.
For example, if Argentina gains access to the debt market and bond rates converge to levels of CCC+/B- countries (ie Egypt, Turkey, Nigeria, El Salvador, Angola, Ecuador, Barbados and Cameroon), the bonds Argentines in dollars should yield between approximately 8.6% and 10.3% depending on the term. If Argentina achieves that milestone in the next 12 months, we estimate that dollar bonds could generate gains of an additional 30% to 40%.
On the other hand, if we assume that cash with settlement remains at constant values and a yield differential of -2.5pp with respect to the dollar curve (in line with the 2016-2019 average), under the same optimistic scenario we estimate that Medium and long CER bonds could generate gains of between 17% and 23% in dollars.
Therefore, it is necessary that the liquidated cash appreciate in the order of an additional 12% over the next 12 months for these bonds to outperform the dollar debt. This could happen if the free dollar converges to the official one without a devaluation jump as the government wants, although it looks defiant.
Conclusion: Do I maintain a positioning in dollars or CER?
The most sensible answer currently is: maintain a balanced portfolio. As we tried to show above, both curves are already quite arbitraged and offer attractive returns. Therefore, currency preference will mainly depend on the investor’s investment objective.
Both curves continue to offer very attractive opportunities if the optimistic scenario is consolidated. Having savings in inflation-adjusted pesos should be useful for anyone residing in this country.
At the same time, we cannot deny the importance of generating positive returns in dollars, especially when the ultimate goal of the investment was to achieve some consumption in that currency, such as the purchase of a property, a vehicle or a vacation abroad.
PPI Research Asset Management
Source: Ambito
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