In this news
The latest macroeconomic data postpone the start of the Fed’s rate cut.
This causes a rally in US Treasury bond rates and Argentine debt suffers in the context of greater global volatility. They emphasize that local variables become more important so that the bullish momentum in bonds can continue.
Argentine bonds import global volatility and operate downward. The latest macro data sets off alarms on Wall Street and stocks plummet.
A change of scenery
Argentine bonds are trading lower due to a more adverse global scenario for the fixed income universe.
The latest macroeconomic data in the US confirmed the definitive postponement of the Fed’s rate cut.
With the economy going, investors are contemplating the chances of stagflation in the US.
US GDP increased at an annualized rate of 1.6%, and was below the 2.5% forecast that economists had in mind.
Furthermore, in the same report the underlying GDP inflation data was known and it jumped above what investors expected. It advanced to 3.7%, above the 3.4% expected by investors.
For analysts, both data configure a context of stagflation.
To this we must add inflation records published in the last month that were also above what economists expected.
In addition, the economy is working at full employment levels and consumption was well above what economists expected.
With this data, investors postponed lowering rates once again, placing the first cut in December of this year.
At the beginning of 2024, investors expected the Fed to lower the rate by up to 6 times, starting in March.
Then the start of the rate cut was postponed, and finally the first movement is now expected to be in December, leaving only one drop for the entire year.
The latest macroeconomic data is not in line with the Fed’s need to lower the interest rate, but even They give more arguments to the US central bank to have to leave the rate at these levels, and even to raise it.
In a context in which investors incorporated this change in expectations about the future of the Fed’s monetary policy, from a lax bias to a more restrictive one, American Treasury bond rates soared.
The yields on 10-year Treasury bonds rose seven basis points after the publication of the GDP data, reaching 4.7%, touching the highest value of the year.
Global and Argentine fixed income volatility suffers
The fact that rates are falling implies that US treasury bonds are trading lower.
With US Treasury bond rates at record highs, investment grade bonds are down 5.5%, while the global bond index is down 4% for the year.
The market debt index falls 2.2% and the speculative grade index falls 1.6% in 2024.
Therefore, Weaknesses in the US bond market end up causing a contagion effect on the rest of the fixed income securities global, including Argentine bonds.
Affected by the international scenario, Argentine bonds are undergoing an incipient corrective process in recent days. All sections of the curve recede and move slightly away from their maximums.
Bonds for 2029 and 2030 fall 3.8% and 3% respectively.
The 2035 and 2038 Globals fell 4.3% and 3.8% in the last 3 days, while the longer-term bonds maturing in 2041 and 2046 fell 4.8% and 4.1% respectively from their recent peaks .
The weaknesses in Argentine bonds are fundamentally due to global issues, rather than domestic variables.
Juan Manuel Franco, chief economist of Grupo SBS, explained that so far this year, the market has been adjusting to the fact that the US economy remains robust and that the most underlying components of inflation are still far from running. at the Fed’s target pace.
“For this reason, the market went from expecting almost 6 rate cuts this year to pricing less than 2 for a few weeks. Meanwhile, long rates rose sharply in the last moving month,” he stated.
In that sense, and thinking about the impact on Argentina, Franco explains that In an environment of high rates, emerging debt is under pressure, although in our case, domestic factors weigh heavily.
“We believe that, although the external market, if it becomes volatile, would imply some headwind, if the Argentine macro imbalances are thoroughly addressed and corrected, there could still be value for investors in sovereign debt in Argentine dollars,” said.
Maximiliano Bagilet, Team Leader of TSA Burstil, highlighted that at the local level, investors in Argentine bonds closely follow the inflation rate in the US.
“If inflation in the US stagnates at these levels we see a real risk of increasing rates. The probabilities of a rate cut fell from above 80% to almost 20%. In any case, with a warmer economic scenario and full employment we have already ruled out the two cuts that were projected at the beginning of the year. “This is beginning to be discounted selectively in emerging markets as well as in some local assets,” said Bagilet.
Weighing local factors
In this context, the idea of the Fed’s “higher for longer” is consolidated, so the market consolidates the idea that the Fed will keep rates high for longer.
The fact that rates stay high for longer could represent a headwind for Argentine bonds.
However, there is a certain consensus that local issues could contribute to Argentine bonds continuing to improve, even despite facing a more adverse global scenario.
At the moment, 61% of the Argentine country risk is explained by local variables, while 17% is explained by the Latin American country risk and 22% by American Treasury bonds.
In a context in which the global scenario becomes more adverse, dependence on local variables becomes more important to allow the improvement in local bonds to last.
Consultatio analysts warned that the fact that financial conditions tighten represents an extra challenge for Argentina, which It needs to access external financing so that its debt is sustainable from 2025.
In that sense, they highlighted that local variables become more important.
“In this context, it becomes more pressing for the Government to be able to achieve the support of Congress to be able to give sustainability over time to the improvements it obtained on the fiscal, monetary and external front,” they said.
For Adrin Yarde Buller, strategist at Facimex Valores, local variables are key to the dynamics of Argentine bonds.
“The accumulation of reserves will probably be the most important factor in dissipating the risk of short-term default, due to its effect on liquidity. “The advance of fiscal consolidation, due to its impact on debt sustainability, and the popularity of the Government, as a sign of social sustainability of the chosen path, will be two other drivers of compression,” said.
Bagilet agrees with the other analysts by highlighting that local variables seem more important in the short term.
In that sense, the TSA Burstil specialist stated that the taking of profits from the bonds these days may be somewhat associated with the global situation. However, the company remains optimistic about the Argentine doubt and decoupled from the global situation.
“We believe that the local is still decoupled from the global and regional situation. The market remains expectant of the institutional reorganization, that is, the approval of the basic law. “The approval of this law will be the starting point for Argentine assets, which, until now, have only discounted the short-term success in the macroeconomic plan, although with certain doubts regarding the sustainability of this plan in the medium term.” , held.
