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Argentine devaluation hits Latin bonds

Jan 24, 2014

Fixed income markets across Latin America suffer as investors grapple with the sharpest fall in Argentina’s currency since 2002

Investors in Latin bonds and currencies were nursing their wounds Friday while bracing for more pain ahead following a sharp market sell-off triggered by an abrupt fall in the Argentine peso.

The currency on Thursday suffered its sharpest fall since 2002, touching ARS8.2 per dollar from ARS6.9 earlier in the day. By Friday afternoon it was trading at close to ARS8 per dollar. The peso returned from its weakest point after the central bank sold dollars.

Bonds sold by Argentine provinces were seen on Friday trading 10 points lower than before the devaluation, while local market notes across Latin America continued to struggle.

   Argentine CDS, 24 Jan 2013 - 24 Jan 2014  
   Source: Markit  

"Some of these high yield countries are starting to crack. And that’s where a lot of alpha is generated for the buy side," said Carl Ross, managing director of investments at Oppenheimer, pointing also to Venezuelan notes.

While the market had "seized up", Ross added that there was little fundamental change in the underlying economic data. "I think it is mostly noise," he said.

Local currency bonds were being "beaten up", said Jonathan Lemco, sovereign strategist at Vanguard. That was a result of a sweeping range of concerns hitting global emerging markets — including riots in the Ukraine and Chinese purchasing managers’ index data that indicated that economy was contracting — as well as the Argentine devaluation, he said.

Nonetheless, Argentine CDS were heavily hit, reaching 2,535bp on Friday afternoon after closing at 2,373bp the previous day, according to Markit. Venezuelan CDS also suffered, reaching 1,408bp on Friday afternoon, up more than 40bp on the day.

Better-regarded Latin sovereigns Brazil, Colombia and Mexico were not immune, however: their CDS widened 10bp to 12bp between Wednesday and Friday.

AJ Mediratta, portfolio manager and co-president of Greylock Capital Management, said the spill-over was exaggerated. "Losses lead to losses, and people start doing other things to stop the bleeding. It can become self-fulfilling," he said.

Mediratta described the fall in the peso as "one of the first economically rational things" that Argentina has done for some time. LF

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  • ERIKA_arg Feb 3, 2014

    really this is very sad, carries the Argentine people to borrow more and more, wages do not increase, insecurity is constant ... Argentina needs to move forward .. leave the dysfunctional government they HAVE TO GO! or by reason

  • Mario Goldman Jan 30, 2014

    There is a storng politicall uncertinity. This has ecomomic consecuences. In this political context, there will be no inmediate change. There is a permanent lost of value of the local currency, the PESO, against the american dollar.. The economic future is uncertain.

  • George Hartwell Jan 30, 2014

    The partial devaluation is not nearly enough. Argentina is still expensive at that level. Central Bank reserves are reducing fast, commodity prices are reducing, thereby reducing export receivables and there is USD 6bn of debt and USD 2.5bn of interest to be paid this year, and in 2015 and in 2016. Reserves are therefore likely to run out late 2015. Argentina will have to default and also devalue significantly.

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