Salvador Di Stefano

Bonds in CER pesos or bonds in dollars.

Bonds in inflation-adjusted pesos seem to have lost the great appeal they had a few months ago, however, it’s all a matter of how the investment is measured.

The TX26, for example, is a bond that adjusts for inflation and pays a rate of 2.0% annually. This bond is worth $1,718.5 in the market, while its technical value that arises from its nominal value due to the update of the retail price index gives us a value of $1,730.63, therefore the security is quoted at a parity of 99. 3%. The bond amortizes 20% of the capital in 5 consecutive semiannual installments, and pays a semiannual income of 1%, from November 9, 2024 onwards.

If we measure this investment with the internal rate of return, which arises from reinvesting the coupons it pays, this gives us a return equivalent to inflation plus an additional 2.7%.

Inflation for the next 12 months, measured between June 2024 and May 2025, would be 70% as indicated by the Central Bank’s Market Expectations Survey, this would indicate a performance for the TX26 that would probably be 72%. .7% annually. This yield is higher than the longest Lecap, which is the one that expires on March 31, 2025, which has an internal rate of return of 60.37% per year. If we take that the government will continue for a year with a devaluation of 2.2% monthly, the devaluation in 12 months would be 29.8% annually. In this comparison, clearly the bonds in pesos adjusted for inflation appear to have a better profit ahead than a traditional fixed term (which yields 32% annually), the Lecap that yields 60.4% annually, and the instruments tied to the dollar linked since the expected devaluation is 29.8% annually.

If we look back, in 2024, bonds in pesos adjusted for inflation such as TX26, between December 31, 2023 and June 13, rose 60.6% annually, in the same period the devaluation of the peso was 13.2% (projected to the official dollar at $915 by the end of the month), and the CCL dollar would rise 31.6% according to our projections (a 40% gap with the official dollar). In this comparison the TX26 were clear winners, both in pesos and dollars. In the first 6 months of the year we estimate an inflation of 81.4%, this tells us that the TX26 did not beat inflation, despite adjusting for this indicator.

Bonds in pesos adjusted for inflation and bonds in dollars

Bonds in pesos adjusted for inflation should have a similar rate of return to bonds in dollars, as long as we assume that inflation and the devaluation rate will be similar, otherwise they should have different rates in order to arbitrate according to a common rule.

In Mexico and Brazil, inflation-adjusted bonds are arbitrated at a similar rate to dollar bonds; it does not seem that the same thing happens in Argentina due to the capricious monetary policy we have, where inflation runs at a rate higher than the inflation rate. devaluation of the peso, which gives rise to significant inflation in dollars.

For example, in the year 2023 the inflation rate was 211.4% per year while the devaluation rate was 356.5% per year, this resulted in a deflation in dollars of 31.9% per year.

For the year 2024, inflation is expected to be 147.7% annually while the devaluation rate would be 29.8% annually, this would result in inflation in dollars of 77.8% annually.

For the year 2025, inflation is expected to be 46.7% annually, while the devaluation rate would be 29.8% annually, this would result in inflation in dollars of 13.0% annually.

The projections may seem fanciful, and difficult to fulfill, however, they are probable situations, not infallible. It could also happen that the government implements a policy of currency competition, and this causes the market to be based on a single heart on the peso and the dollar, which would bring us closer to equality between bonds in pesos adjusted for inflation and dollar bonds.

At current prices, the AL29 bond in dollars yields 25.8% annually, while the TX28, which matures 8 months earlier, yields inflation plus 4.8% annually. If the inflation rate and the devaluation rate would equalize, the AL29 should increase in price to equal the rate of the TX28, or the TX 28 should fall to meet at some point the rate of the AL29 bond.

Conclusion

. – As long as we do not have a defined monetary and exchange rate policy, our impression is that the bonds in dollars and pesos adjusted for inflation will adjust taking into account the high inflation in dollars that will operate in the Argentine economy.

. – In recent months we see that sovereign bonds in dollars have been growing in parity, this implies greater demand from investors as they observe that Argentina achieves a fiscal surplus, and in this way it can honor the public debt.

. – The bonds in pesos adjusted for inflation in the first 4 months of the year operated with prices that were above their discounted technical value, negative rates against inflation, this indicated to us that their rates were arbitrated against the fixed-term rate. In the months of May and June we witnessed a sharp drop in the fixed-term rate, and the bonds stopped arbitraging against this rate that lost relevance, and began to discount the Central Bank implementing a monetary policy of currency competition, with lifting of the stocks and positive rates against inflation. In this way, the price of the bonds began to fall below their technical value, giving room for positive interest rates.

. – The Central Bank should explain what its monetary and exchange rate policy will be in the future, in order to lift the veil of what may happen in terms of investments. At the moment we see that dollar bonds tend to seek higher parities and lower yields, while bonds in inflation-adjusted pesos seek lower parities and higher yields. At the moment these movements do not invite arbitrage, since inflation in dollars could be very high, and keep bonds in pesos adjusted for inflation with much lower rates of return than bonds in dollars.

. – We are beginning to see more important approximations in bonds in inflation-adjusted pesos and in longer-term dollars. For example, the DICP bond that matures in 2033 and begins to pay amortization and rent in June 2024 yields inflation plus 5.7% annually, while a bond in dollars maturing in 2035 yields 18.0%. annual.

. – There are many unknowns left to be revealed, but the competition between both titles is exciting. How is this enigma solved? In only one way, diversifying. We will have to have bonds in pesos adjusted for inflation and bonds in dollars, in both short and long cases, the best way to achieve a balance of what we do not know can happen in Argentina, dollarization? coin competition? a new convertibility? Elimination of the Central Bank? We will know soon.

. – For bondholders in dollars, arbitrage from short to long bonds looks very attractive, such as selling AL30 and buying AL35, the longer bond has less to fall, and more to rise percentage wise. You have to be covered on both sides.

More information on Milei’s economic policy in our private reports. The new government changes the way of doing business. All Argentine bond fund flow developments. Consult 0341 6 43 0555 for our private reports, daily audios linked to the economy and the countryside, the run run of Politics, business audios, and all the sectoral information you can imagine. What to invest in today.

Disclaimer: Salvador Di Stefano SRL is not responsible for the final result of the opinions made in this report on economic and financial operations carried out by the user.