Fast reading
- Argentina’s finance ministry under President Javier Milei swapped debt worth some 42.6tn pesos (US$50.3bn) – representing 77% of treasury instruments due in 2024.
- The debt swap could clear the way for currency controls to be lifted later this year.
- The equities rally continued unabated: the S&P 500 Index hit a new historic high on Tuesday (12 March).
- Credit markets joined the upbeat jamboree, with triple Cs recording their best month-to-date performance on record by midweek.
Argentina made headlines this week with news that Minister of Economy Luis Caputo had engineered a debt swap of some US$50.3bn of peso- and US-dollar-linked instruments due in 2024, in favour of titles set to mature between 2025 and 2028. The debt swap should provide South America’s second-largest economy with fiscal breathing space as it grapples with rampant inflation.
After hitting a three-decade annual high of 276.2% in February, recent month-on-month reads suggest inflationary pressures are beginning to recede.1 President Javier Milei has said he expects to be able to abolish currency controls later this year should inflation continue to fall at its current rate.
For Jason DeVito, Lead Portfolio Manager for Emerging Markets Debt at Federated Hermes, the debt swap is part of a wider mission to rein in Argentina’s fiscal burden. He notes an « iron will commitment” from President Milei to lower public spending, possibly as a prelude to negotiating fresh money from the International Monetary Fund. However, any austerity drive will be far from risk free, he adds.
For now, a large swath of the population seems willing to endure pain, in order to ensure a brighter longer-term outcome for Argentina.
« The agenda invariably involves painful cuts to wages and social programmes. An added complication is a possible pushback from provinces who do not want to see federal transfers cut. However, here we see the potential for higher tax revenues from these provinces to mollify their objections to lower federal transfers.
« For now, a large swath of the population seems willing to endure pain, in order to ensure a brighter longer-term outcome for Argentina. Yet, this is only one piece of the puzzle and greater fiscal savings are still required. »
Rally, undeterred
In other news, the equity rally continued this week, albeit with a continued broadening out beyond the narrow range of names associated with the ‘Magnificent Seven’ narrative of recent months.
Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited, notes that the positive performance came despite concerns over a hot CPI print in the US, with the S&P 500 Index climbing to yet another all-time high in Tuesday’s session, driven by growth and tech.
« While this has come to be the norm in the age of the Magnificent Seven, it doesn’t quite reflect the overall trend we’ve seen this month: a rotation out of momentum and a broadening out of the market, » she says. « This has alleviated wider investor concerns of a narrow market, and given legs to the risk-on rally.
Credit markets also took part in the party, with lower-rated instruments performing especially well. By midweek, triple Cs had witnessed steady gains for 14 straight sessions, the longest winning streak in more than three years, while yields hit a 10-week low at 11.92% and spreads plunged to a fresh two-year low of 726 bps.2
Figure 1: Buoyant bonds – credit on a tear
How quickly and how many
With a soft landing outcome now expected by an overwhelming consensus of investors, the most important question for positioning is rate cuts: how quickly and how many, according to Dudley.
« While there isn’t much agreement among investors when it comes to the speed and magnitude of cuts, there are few betting against the longer-term outlook of a decline in benchmark rates, » she explains. « Of course, dovishness and growth go hand-in-hand, and so, as long-term investors, we favour growth in this environment, but remain cognisant that the road to low rates is not likely to be a smooth one. As such, we maintain our quality bias in the growth space. »
For a view on when the Fed will cut rates please see: Markets heed data, not Fed Speak
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1 February’s monthly inflation rate slowed to 13.2%, compared to 20.6% in January and 25.5% in December. Source: Instituto Nacional de Estadística y Censos (INDEC), 12 March 2024.
2 Source: Bloomberg as of 12 March 2024.
