Argentine banks warn that inflation-linked bonds are no longer a business

Banks and funds in Argentina advise their clients reduce holdings of short-term bonds with inflation-linked interest payments, as there are early signs fueling market optimism regarding President Javier Milei’s promise to put an end to rampant price increases.

The forecasts of recession and the decrease in the amount of money in circulation, as well as the narrowing the gap between exchange rates and cooling of inflation expectations, They are leading investors to shed inflation-linked bonds that until recently had become the primary investment to protect peso portfolios from triple-digit price rises.

“The decline in inflation is much faster than we expected and this forces you to “portfolio rebalancing”She said Mariano Calviello, chief portfolio manager From Fimathe investment arm of Bank of Galicia, and which is the largest holder of inflation-linked bonds, according to data compiled by Bloomberg. “Inflation-linked bonds must adapt to this new reality.”

However, for two months Argentina has recorded lower-than-expected inflation remains at crisis levels. In the first two months of the Milei government, prices accumulated an increase of 51.3%, below the 57.3% expected in a Bloomberg survey. The new president predicts that the data could surprise again in February, with an increase of approximately 15% monthly, compared to market expectations of 18%.

“The short end of the inflation curve has lost its appeal,” he said. Juan Carlos Barbozachief economist of Mariva Bank, based in Buenos Aires, in a note to clients, referring to the inflation-adjusted bond ratio. “Inflation data has been surprisingly bearish and bond prices continue to remain strong.”

In addition to Galicia and Mariva, AdCap Securities and the local broker Neix They also told this to their customers in Argentina sell or make a profit in CPI-linked bonds.

Without a doubt, Milei’s economic plan faces great challenges in terms of inflation and history has repeatedly shown that the early hopes of investors in Argentina they seem frustrated later for the country in crisis.

For example, market optimism plummeted in 2019 after former President Mauricio Macri lost a primary election, ending his pro-market agenda after Argentina’s inflation rate doubled in his final two years in charge. A number of factors – unions, bills, transport costs, education – could push inflation higher again in the coming months.

The problem is, there’s nothing better

Not all investors are changing their strategy. The brokers Balanz Capital and TPCG Valores It is also estimated that inflation will cool, but They don’t advise their customers. Don’t bet on inflation-linked bonds because short-term fixed rates and exchange rate-linked bonds offer even worse returns.

Until recently, investors sat comfortably in inflation-linked bonds, with annual price increases of more than 250%. Demand for this coverage was so high that the bonds offered a negative real interest rate. But economists surveyed last month by the Central Bank expect monthly inflation to gradually calm down. from 21% last month to 8% in June.

“We recommend take some profits in CPI-linked bonds anddollarise part of the portfolio with more conservative bonds”, AS double bonuses, She said Javier Casabal, strategist AdCap, another major investor in inflation-linked securities. “There is an avalanche of news that shows a huge belief that everything is going in the same direction of lowering inflation, no matter what.”

High-frequency inflation data shows monthly price increases cooling, while the peso’s parallel exchange rate has strengthened about 11% over the past 30 days, to 1,100 per dollar, diminishing the need for another sudden movement. Consumer spending collapsed in December after Milei devalued the official peso exchange rate by 54% overnight and lifted years of price controls, cementing recession projections for 2024.

“The recession, the adjustment of relative prices and the elimination of the deficit are what is needed for inflation to fall in Argentina. “Milei is playing right in that direction,” she said. Alberto Bernal, chief strategist at XP Investments in Miami.