Goldman, Stone Harbor wind back Argentina bets after bond rally

Investors who rode an eye-popping rally in Argentina’s sovereign debt this year are starting to pull back, citing President Javier Milei’s challenge to hold onto voter support while chasing a harsh austerity agenda.

Goldman Sachs & Co closed its recommendation to go long the government’s dollar notes in April, and Stone Harbor Investment Partners has also turned neutral on the credit. Bank of America Corp and UBS say stellar gains are unlikely to be repeated, while some funds have sold their Argentine debt holdings altogether.

Goldman had jumped on the Milei bandwagon just days after he came to office in December, joining the chorus of Wall Street analysts saying he may be the man to turn around Argentina’s embattled economy. The bullish call — also touted by banks including BofA, UBS and Citigroup throughout 2023 — has stoked average returns of about 83 percent on its dollar-denominated bonds since Milei won elections in November, data compiled by Bloomberg show. That’s well above the 9.2 percent gain for an index of emerging market sovereign debt in the span.

Now, five months later, many think the rally has run its course, at least until the government can push a slew of belt-tightening reforms through an opposition-led Congress. It’s a tall order as inflation nears 300 percent and the economy remains mired in recession.

“The amount of bad news being discounted has declined pretty dramatically,” said Alejo Czerwonko, chief investment officer for EM Americas at UBS Global Wealth Management. “If we see delivery on the domestic policy agenda and the market coming to terms with no restructuring under Milei, than you can see further upside.”

Goldman had added Argentina’s bonds to a basket of preferred emerging-market distressed credits in mid-December. It has now scrapped the recommendation to buy the broader basket. A spokesperson for the bank declined to comment beyond the firm’s research notes.

‘Expiration date’

Investors are hoping that Milei, a libertarian outsider, will stabilise a cratering economy, reverse years of budget deficits and attract back the billions of dollars Argentines hold abroad.

As such, they’ll be watching the country’s Senate this month as it debates a scaled-back version of Milei’s sweeping reform bill that aims to cut spending and raise taxes. It has already been approved by the lower house.

“The key here continues to be preserving high levels of popularity, which will determine how much runway he has to repair the country’s balance sheet,” said Patrick Esteruelas, global head of research at Emso Asset Management in Miami. “That has an expiration date.”

Esteruelas said in early 2023 Argentina was the “most interesting” EM credit opportunity at the time.

Stone Harbor, which was overweight Argentina last year, has since moved to a neutral stance on bonds as reforms go through Congress. The firm said the change was made earlier this year, declining to give further details on timing.

“We’re very realistic,” said Jim Craige, Stone Harbor’s head of emerging markets and co-chief investment officer. “Argentina got restructured enough times for you to realise things can end poorly pretty quickly.”

Yield spread

Investors demand about 1,200 basis points of extra yield over US Treasuries to hold Argentina’s dollar debt, according to JPMorgan data. And while that is well above the threshold for distress, the spread has tumbled almost 700 basis points since Milei took office on December 10. Argentina’s peso has also soared in the so-called "blue-chip swap" market used by many investors and companies as Milei pushes through what he calls “shock therapy” measures that include budget cuts equivalent to almost four percent of the country’s economic output.

Current bond prices suggest investors expect the country to make a coupon payment due in July and handle the partial amortisation of the 2030 bonds, according to Esteruelas. They are also assigning higher odds of Argentina paying its debts through January, he said.

For many, that pricing means the bonds are no longer attractive. BofA analysts, who upgraded Argentina’s debt to overweight in July, closed their recommendation to buy the 2035 bonds after the original target of 40 cents on the dollar was reached in March. They reaffirmed a constructive view for the credit, but told clients to embark on a relative-value trade, favoring the 2046 notes over those maturing in 2035.

Lumina Capital Management Ltda, a Brazilian alternative asset-management firm founded by the former head of Morgan Stanley’s Brazil unit Daniel Goldberg, has fully exited its position in Argentina’s sovereign debt.

“Those bonds that were trading near 18 cents on the dollar are now close to 60,” Goldberg said in a podcast last month. “There isn’t much prospective return — unless you have a very differentiated view of what’s going on in Argentina.”