Argentina’s bonds have held firm after the central bank’s monetary policy committee (MPC) opted to hold interest rates at 40% this week.
The sovereign issuer’s 10-year note has widened some 4bp this week to around 7.5% in secondary markets, but this is a far cry from the 8% mark seen earlier this month.
“Everyone seemed OK with the currency being under control… For now,” one analyst following the bonds’ performance said. “The peso being backstopped at ARS25 [against the dollar] and the government saying it will buy $5bn [in reserves] at ARS25 was a good sign.”
Across the curve, Argentina’s bonds appeared roughly 10bp wider, with the 30-year note spotted at near 8.25% in secondary trading.
“There is a slight stabilization, but the spreads are nowhere near where they were,” added the source. “The headlines now will be around reducing the deficit and awaiting the results of the IMF discussions.” Argentina reached out to a number of multilateral lenders for additional lines of credit earlier this month.
The MPC’s decision to hold rates this week reiterates the central bank’s hawkish guidance because of a challenging inflation situation and foreign exchange environment.
Alberto Ramos, an economist with Goldman Sachs said: “The policy rate should remain high to contain pass-through from ARS depreciation to local prices.”
Real interest rates are also expected to remain “significantly higher” than before Argentina’s emergency rate hikes due to higher volatility in emerging markets, added Ramos.
“Events of the last two weeks will likely leave a long-lasting ‘financial scar,’” said Ramos in a report.
The MPC said near-term policy should remain high. It also said operational frameworks will normalize and return to a narrower policy rate band that allows for automatic transmission of interest rates. The current seven-day repo band is 47% for lending and 33% for seven-day borrowing.
Core inflation pressures this month remain high, headline inflation will moderate because of slower inflation among regulated prices. The 2018 intermediate inflation target is at 15%.
Despite the near-25% drop in the peso against the dollar, Argentina is not facing a sovereign debt crisis, Capital Economics said in a report. The public debt ratio will increase, but it can stabilize if policymakers maintain fiscal tightening, the economics consultancy said.
“Government’s upcoming dollar debt repayment schedule looks manageable,” the report said. “The big risk is that IMF talks break down, triggering a renewed run on the peso and surge in bond yields.”