Argentine devaluation hits Latin bonds

Argentine devaluation hits Latin bonds


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