Argentina's New Bonds Trade Up

Bloomberg reported today that Argentina's new bonds are already trading-up, despite the fact that they haven't even been issued yet. The bonds are trading on a "when-issued" market ahed of the April 1 swap date, when holders of the defaulted bonds will swap their old bonds for the new ones that are not in default.

About The New Bonds

These new bonds are denominated in dollars, not pesos -- meaning Argentina can't print money to pay them off. They're also immune from inflation in Argentina's economy. Obviously they will be subject to US Dollar inflation and all other risks that go with holding assets denominated in US Dollars.

These new bonds are paying an 8.3% yield and they mature in 2033. However, they are currently trading a 91 cents on the dollar (up from 87 cents on the dollar), giving them an actual yield of 9%.

What Does This Mean

The market is confident about Argentina's ability to repay these bonds -- at least in the short term. Argentina's bonds are trading at just 4.7% above US Treasuries (which is considered to have almost no risk). Brazil, which has bonds rated three levels higher by Moody's, has a yield of just 4% above treasures. Argentina's bonds, despite being much riskier according to Moody's, are trading at just 70 basis points (meaning the interest rate is just 0.7% higher) than Brazil's bonds. Rafael Ber, an analyst with Argentine Research in Buenos Aires, thinks Argentina should be at least 150 basis points above Brazil, based on the two countries history of defaults.

So, Are The New Bonds Risky?

For the short-term, it seems like the answer is no. Now that Argentina's debt has been restructured, it currently stands at 72% of GDP. For comparison, the USA has debt at 66% of GDP. However, Argentina is currently operating at a budget surplus and is bringing in enough tax dollars to easily service their debt and pay for their current government programs. These bonds would actually be a good way for expatriates to earn a high yield, assuming the the following conditions continue to be met:

1. The Argentine economy continues to grow.
2. The government continues a budget surplus.
3. Government spending is restrained and grows no faster than GDP.

Will these factors exist for the next 30 or so years until the bonds mature? Who knows. If you're an expatriate living in Buenos Aires, however, you should be aware of the local economic conditions. If it looks like things are going downhill, you can always dump the bonds. The problem last time is that most investors in Argentina's bonds were elderly European retirees who didn't bother to keep up with the condition of Argentina's financial situation. The smart money sold the bonds before they went into default.

Would You Really Recommend These Bonds?

Not to anyone who doesn't live in Argentina. I'm a firm believer of "invest in what you know". Any expatriate living in a country should be aware of the local economic conditions, giving them a common sense understanding of what to do. As an expatriate, you should know about economic conditions months before other people. If you think the country's on a downward trend, sell, don't wait until its too late. When a country is headed down the tubes, there will always be warning signs. Pay attention, read the newspaper, and make sure to spot them. Still, don't put your entire nest egg here. Only risk what you can afford to lose. This is still an "emerging market" country.