Traders bet big on Milei crushing 200% inflation in Argentina

President Javier Milei’s crusade against inflation has gotten off to an uneven start in year one. The annual rate, while slowing, remains above 200 percent. But investors are betting that next year will bring far greater progress, predicting the rate will steadily plunge.

Pricing in the local bond market indicates traders foresee the monthly inflation rate dropping to 1.9 percent, dragging the annual rate down to 25 percent, according to PPI, a local brokerage. That’s below the 35 percent rate consensus forecast by economists and would mark the lowest annual rate in seven years.

Argentines have lived through triple-digit annual price increases for almost two years. The cost of living has come down but remains elevated, hitting an annualised rate of 209 percent in September compared to its previous peak of 289.4 percent in April and 138 percent during the prior-year period, according to statistics agency INDEC.

“People had given Milei a very clear mandate: lower inflation, no matter what,” said Barbara Guerezta, a strategist at Delta Asset Management in Buenos Aires. “Milei knows he has to fulfill a campaign promise and he is doing it.”

The so-called break-even, or the gap between fixed-rate and inflation-linked bonds, shows the market is forecasting lower inflation levels than economists predict. Many of them estimate that it will come in at an annualised rate of 35 percent in 2025, according to a recent survey by the country’s Central Bank. Delta Asset Management, on the other hand, expects it to collapse to as low as 20 percent for the year. Too good to be true?

A 2017 repeat?  

The stakes are high not just for Javier Milei’s government, but also for investors. “This trade was based on total confidence in the government’s plan,” said Alejo Costa, chief economist at brokerage firm Max Capital.

Investors who took part believe that the government will succeed in reducing inflation, depreciating the official peso and strengthening the parallel peso, which is based on securities bought locally and sold abroad. It trades about 16 percent weaker than its peers.

Lurking behind this optimistic strategy is a simmering concern that Milei is letting the Argentine peso become too strong, even before Donald Trump’s election win sent the US dollar on a rally. A stronger dollar exacerbates pressure on Milei’s currency controls, and some analysts warn of another devaluation.

Others stress. “Every night I go to sleep thinking if the time has come to unwind my investment position” before there is a foreign exchange event, said Emiliano Merenda, president of Pharos Capital, another brokerage.

Merenda in March 2023 took out a guaranteed loan backed by securities to buy US$100,000 in peso notes, generating a profit of 35 percent and more than covering the 25 percent interest rate on the loan. 

The memory of 2017 however is haunting Merenda and others. That year marked the last in which a carry trade that involved peso-denominated assets and a stable exchange rate generated healthy profits, followed by a financial crisis in 2018 that triggered a selloff by offshore funds and a 50 percent devaluation of the peso.

Traders are worried about the recent appreciation of the Argentine peso as the Central Bank continues to run a deficit, meaning it is unable to defend the currency if need be.

Different scenarios 

Some traders already moved to unwind their fixed-rate peso holdings. Carolina Schuartzman, director of sales and trading at Columbus Investment Banking, is one of them. “I see the market still very positive and betting on fixed rates in pesos, but I am more comfortable unwinding and going to inflation-linked bonds,” she said.

Even though she doesn’t see similar exchange-rate risks as in 2017, she prefers to be cautious. “Twenty-five percent of inflation sounds too low, especially knowing that there is still a partial release of exchange restrictions and there are relative price problems to be solved,” Schuartzman said.

The executive thinks that 2024 will be different — for the following reasons: Argentina still has currency controls in place, local debt is in the hands of local investors and the country doesn’t have a fiscal deficit.

Current spreads indicate some risk, but Merenda still expects to profit. The rate on peso notes, between 30% and 50% per year, is higher than the consensus expectations for inflation and devaluation levels.

“For Argentine investors, the trade looks good. It’s not over,” Max Valores’s Costa says.