A new expectation figure for inflation future that circulates in the market shows that investors remain quite in line with the path of deceleration that the Government of Javier Milei. For the April-December period they expect that the Consumer Price Index (CPI) of the Indec progress at a rate of 5.2% average monthly, although the exit from the exchange rate is further away.
Unlike the surveys carried out by the Central Bank of the Argentine Republic (BCRA) and surveys among specialists carried out by private companies, this data does not arise from any consultation. It arises from the risk that investors are willing to assume in the market. Nobody makes their numbers and shares them, but rather the figures allow us to read the vision that each operator plays for when he buys or sells a bond in pesos.
The return of the Fixed rate Treasury bonds (Lecaps) implies that the nominal expectations of the economy can be observed in real time through an indicator known as implicit inflation or “Break even”. The exercise is possible through the calculation of the inflation rate that would leave an investor indifferent between positioning in a Lecap and buying an inflation-adjusted security (CER).
In short, it answers the question: How much do CER bonds have to pay to yield the same as one at a fixed rate? (returns are expected, not assured)
A report of GMA Capitalthe firm led by Nery Persichinidetailed that with the current yield of the S31M5 (fixed rate) at 4.1% Monthly Effective Rate and taking the closing of the Boncer T2X5, an average CPI of indifference between April and December is expected to be 5.2 percent.
“At GMA we do the exercise of taking the BCRA estimates for the first two months, and we look for those monthly rates that, gradually, validate the implicit inflation between the fixed rate and CER,” they explained.
A report of Cohen highlighted: “Driven by the reduction in interest, fixed rate bonds once again offered the best performance of the peso curves. In the last week, lecaps gained 4.0% and their TEMs ranged between 3.8% and 4.1%; while the TO26 gained 6.8% weekly and compressed its TEM to 3.2%. The CER bonds suffered a hard blow and fell by an average of 5.5% despite the strong intervention of the BCRA to support the curve.”
“At these levels, the implicit average inflation is 4.7% for the remainder of 2024 and 2.2% between January and October 2025. For its part, the demand for exchange coverage continues not to appear and in the week dollar-linked bonds gained 0.3% and dual bonds 0.7%. Regarding the official dollar, market prices implicitly imply an average nominal devaluation of 5.1% m/m until September 2024, followed by 3.3% m/m until March 2025 and by 4. 6% monthly until June 2025″, they explained.
The trajectory is in line with the speech to investors that Milei gave at the dinner of the Freedom Foundation. There he highlighted that the adjustment of the Treasury and BCRA deficit will deepen the deceleration, which began from 25.5% monthly in December and reached 11% in March.
“Both the analysts and the International Monetary Fund (IMF)When we arrived I was expecting inflation of 250 percent. In an optimistic case. Well, today the Fund expects Argentina’s inflation this year to close at 150 percent. For it to close at 150% between now and the end of the year, average inflation has to be 5 and a half. In other words, by the end of the year it is clear that the inflation rate, given where we are starting, is going to be well below 5 percent. “We are ending inflation,” stated the President.
Price surveys by consulting firms place April inflation below 9%, a figure after five months, although the adjustments in public services can cloud what is published in the definitive data of the Indec.
This process led the BCRA to decide on a new reduction of 10 percentage points to bring the monetary policy rate to 60% nominal annual, 82% effective, negative in real terms. For the entity to continue with the “blender” of its remunerated liabilities is central when thinking about an eventual exit from the exchange rate. Although the other front is to add more international reserves.
The economic team prefers “gradualism” for the exchange front while maintaining a crawling peg 2% monthly, which left the real exchange rate close to the levels it had before the last devaluation. The curve of bonds in pesos tied to inflation show that investors do not believe in a prompt elimination of the stocks.
“In this regard, we identified signs that the lifting of the stocks would not be as close as many believe. Specifically, it takes a long time for the real forward rates of the CER curve to return to positive territory. The idea behind this exercise is to analyze the timing of a reasonable real margin configuration that is consistent with a situation of unrestricted currency competition. In other words, for the peso to be valued by the market compared to alternatives, it should offer a greater real reward, weighted by exchange rate risk,” warned GMA Capital.
In parallel, the Government is still betting on convincing the IMF to disburse fresh funds, around USD 15,000 million, to help exit the stocks. The social network X was the channel used in recent weeks by the Minister of Economy, Luis Caputoand his Secretary of Finance, Pablo Quirnoto make the request to the organization.
