The Government closed the week with euphoria in the markets, which celebrated the drop in the country’s risk to less than 1,000 points, for the first time in 5 years below that line. The new positive impulse was leveraging funds from international organizations agreed upon by the Minister of Economy, Luis Caputo, and the meeting he held with the director of the IMF, Kristalina Georgieva.
This Friday, stocks and bonds flew both due to these positive news, as well as due to the good weather abroad given the increase in the rate of US Treasury notes. In a climate with a calm dollar, investors are looking for alternatives.
Beyond the technical details of the JP Morgan bank’s preparation, the country risk it measures is the flip side of the price of sovereign bonds, since it relates its (fixed) income to its (variable) price in secondary markets. The lower the price, the relatively higher the income or yield of the security in question will be.
The consulting firm Quantum issued a report in which it considered the compression of the nominal rate of the Treasury debt in pesos, which reflects expectations of a slowdown in inflation, with the price of the official dollar sliding to 2% “in the coming months” and the relatively stable free exchange rates, even nominally, to evaluate which financial assets should be invested in pesos, depending on the horizon or term that the investor has in mind.
With this scenario, I propose the following investment options:
- Investment for up to 6 months: The observation is that it would be advisable to invest in debt adjustable by CER “given that breakeven inflation rates, defined as the rate that equates CER yields with fixed rates in pesos at the same maturity) are lower than expected ”. Specifically, the consultancy compares there a “breakeven” inflation of 2.4% against the 3.3% annually that arises from the Survey of Market Expectations (REM) of the Central Bank.
- Investment for 6 to 12 months: In that case, the report says, breakeven inflation “is arbitrated with the expectation of the REM”, so there would be indifference between investing in securities at a fixed rate in pesos or adjustable by CER. In the first case, the risk of “capital loss” would be given by an increase in the inflation rate, and in the second by an increase in the nominal interest rate.
- Investment for more than 12 months: According to Quantum, in that case it is advisable to invest in debt adjustable by CER (inflation). This is a real annual yield of 12%, with a spread close to 1,000 points over certain inflation-adjustable US Treasury bonds). This spread is similar to that of “hard dollar” debt, the consulting firm notes. And he notes that if the Argentine economy continues to normalize and the country risk continues to decline “it is possible to expect falls in the yields of the longest CER debt and also of other sovereign securities in dollars.” For example, he points out, “if the country risk dropped to 800 points, the capital gain of a hard dollar bond like the GD35 would be 16%, almost double that of a long CER bond like the TZX28, which would be in the order of 8.5 percent.
In all of these evaluations, the report clarifies, it is assumed that the price of the dollar “does not vary in real terms,” that is, it keeps pace with inflation. If, on the other hand, the peso were to depreciate (inflation lower than the increase in the free dollar), the yield on the bonds in pesos (in free dollars) would be lower, and the opposite would occur if the price appreciated (in which case the yield on the bonds in the currency would be higher).
The report specifies that the monthly effective rate (TEM) of one-year peso bonds is 3.4%, a significant drop compared to the 3.8 to 4% a few weeks ago. In this way, the effective rate of debt adjustable by CER is 0.2% to 1% positive for terms of less than one year.”
Quantum calculates breakeven rates, which until the middle of next year are lower than the REM inflation expectation. And he observes that if the REM forecasts are verified, for investments with maturities until June 2025 it would be preferable to invest in CER-adjustable securities instead of investing in securities in pesos. “For longer terms, there are practically no differences between these alternatives,” he added.
Finally, the report specifies that long-term CER-adjustable debt today yields between 11 and 12% annually, with a spread over US TIP bonds similar to that of “hard dollar” debt. And he concludes that if Argentina follows the process of macroeconomic normalization and the country risk follows, “it is possible to expect that the falls in the country risk will also have an effect on the yields of the long CER debt, which would give rise to the situation already mentioned. that, with a country risk of 800 points, the capital gain of a hard dollar bond would be much higher than that of one adjustable for inflation.
Source: Ambito
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