Argentina’s bond rally limited by junk label, war fallout

As President Javier Milei meets investors in New York in a bid to attract interest in Argentina’s comeback story, the momentum behind the country’s bonds has largely stalled.

For all the wins – his administration has a hold on inflation, is rebuilding Central Bank reserves and loosening currency controls; it just approved a long-awaited labour reform – Argentina’s bond spreads to benchmark US Treasury yields are still about twice where Milei wants it to be. They fell to a multi-year low in January but have since rebounded, with the rally fading even before the conflict with Iran erupted and roiled global markets.

Milei’s rise to power and his decisive win in midterms late last year triggered a massive repricings in country risk. But more recent achievements have yielded smaller moves. One problem for Argentina, some investors say, is that sovereign bonds are still rated deep into junk territory – essentially sidelining a large pool of would-be buyers, such as pension funds, insurers and emerging market funds that have strict limits on lowly-rated debt.

“Argentina’s spread story is no longer about a lack of good news, but about demand saturation,” said Mauro Favini, senior portfolio manager at Vanguard. “The country is already one of the most crowded high-conviction trades in emerging markets – but at this point, spreads are less about headlines and more about who is allowed to buy the bonds.”

The country’s sovereign debt has been upgraded multiple times since Milei took office in 2022, but it’s still seven notches below investment grade at all three major credit firms. S&P Global Ratings and Moody’s Ratings both have a stable outlook on the debt (Fitch doesn’t assign one at CCC+ or lower.)

S&P, which last lifted Argentina’s score in December, said then that the outlook balanced risks posed by “persistent economic vulnerabilities with improved fiscal outcomes and strengthening investor confidence.” Steps to gain access to external capital markets, it added, should give the government “ greater flexibility to manage its debt.”

Investors have watched closely for signs of when Argentina will return to markets. Milei’s team was contemplating a bond sale – the first since the previous administration reneged on its debt in 2020 – as recently as January, but put the brakes on. Now, the war in Iran has all but shuttered the market for high yield debt sales, making a new issuance in the short term more unlikely.

“There have been small steps in the direction of greater flexibility and potentially higher creditworthiness” said Joydeep Mukherji, managing director for sovereign ratings at S&P. “There’s a virtuous cycle which can start, but we haven’t seen it yet – at least not enough to make any changes.”

Government officials have shown signs of frustration that despite major improvements and legislative approvals, yields are not falling further. Economy Minister Luis Caputo believes spreads should be closer to 250 to 300 basis points, about half the current level.

“If someone had told me that we would buy the amount of reserves we bought, I would never have predicted country risk would rise,” Caputo said at a conference this month. He argued current levels “do not fully reflect the achievements.”

The Central Bank’s weak reserve position – even though it has laid out a path to rebuild it – remains the most pressing matter for investors. There are also concerns about slowing growth and the country’s currency policy.

Milei’s administration has shown little appetite to issue international bonds at current prices, even though investors broadly agree the country is already in a position to borrow, with yields below the 10 percent threshold often seen as a workable level for issuance.

“There is just a lot of Argentine debt in the market, and those who already own it are waiting,” said Diego Ferro, director of Faro Fund in New York. “At this point, purchases are marginal.”