Banks and funds in Argentina are advising their clients to
reduce holdings of short-term bonds with interest payments tied to inflation,
as there are early signs fueling market optimism about President Javier Milei's promise to put an end to unbridled price increases.
Recession
forecasts
and a
decline in the amount of money
in circulation, as well as a
narrowing gap
between exchange rates and
cooling inflation expectations,
are leading investors to divest from inflation-linked bonds. which until recently had become the star investment to protect peso portfolios from triple-digit price increases.
“
The fall in inflation is much faster than we expected
and this forces a
portfolio rebalancing
,” said
Mariano Calviello
,
head portfolio manager
of
Fima
, the investment arm of
Banco Galicia
, and which is the main bondholder. linked to inflation, according to data compiled by Bloomberg.
“Inflation-tied bonds have to adjust to this new reality.”
Argentina has been registering lower-than-expected inflation for two months, although
it remains at crisis levels.
In the first two months of Milei's government,
prices accumulated an increase of 51.3%
, below the 57.3% expected in a Bloomberg survey.
The new president anticipates that the data could surprise again in February, with
an increase of around 15% monthly,
compared to market expectations of 18%.
“The short end of the inflation-tied curve has lost its appeal,”
Juan Carlos Barboza
, chief economist at Buenos Aires-based
Banco Mariva
, said in a note to clients, referring to the ratio of inflation-adjusted bonds.
“Inflation data has been surprisingly downward and bond prices continue to remain strong.”
v1.7 0421
Inflation in the last year
In %
BY ITEMS
Source:
INDEC
Infographic:
Clarín
In addition to Galicia and Mariva,
AdCap Securities
and local broker
Neix
also told their clients in Argentina to
sell or take profits
on bonds tied to the CPI.
To be sure, Milei's economic plan faces major inflation challenges and history has repeatedly shown that investors' early hopes for Argentina
are later dashed
by the crisis-prone country.
For example, market optimism plummeted in 2019 after former President Mauricio Macri lost the primary election, ending his pro-market agenda after Argentina's inflation rate doubled in his final two years in office.
A host of factors — unions, utility bills, transportation costs, education —
could push inflation higher again in the coming months.
The problem is that there is nothing better
Not all investors are changing strategies.
Brokers
Balanz Capital and TPCG Valores
also estimate that inflation will cool, but
they are not advising their clients
not to bet on inflation-linked bonds because
short-term fixed rates and exchange rate-linked bonds still offer worse profitability.
Until recently, investors were comfortable positioning themselves in inflation-linked bonds, with annual price increases of more than 250%.
Demand for this coverage was so high that the securities offered a negative real interest rate.
But economists surveyed last month by the Central Bank expect monthly inflation to gradually cool
from 21% last month to 8% in June.
“We recommend
taking some profits
on bonds tied to the CPI
and dollarizing part of the portfolio with more conservative bonds,”
such as
dual bonds,
said
Javier Casabal,
strategist at
AdCap
, another major investor in inflation-linked securities.
“There is an avalanche of news that shows an enormous conviction that everything is going in the same direction of lowering inflation, no matter what.”
High-frequency inflation data shows a cooling of monthly price increases, while the parallel peso exchange rate strengthened around 11% in the last 30 days, to 1,100 per dollar, diminishing the need for another sudden movement.
Consumer spending plummeted in December after Milei devalued the official peso exchange rate by 54% overnight and lifted years of price controls, cementing recession projections for 2024.
“Recession, adjustment of relative prices and zero deficit is what is needed for inflation to drop in Argentina.
Milei is playing right in that direction,” said
Alberto Bernal,
chief strategist at XP Investments in Miami.
NE