Argentina’s Bond Rally Has Lost Steam as Market Waits for Elections
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Argentina’s world-beating rally in credit markets has ground to a halt, with money managers on hold until at least mid-term elections as President Javier Milei’s much-lauded overhaul of the economy appears to lose momentum.
After returning more than 100% last year, the bonds posted losses of 1.4% in the past month, lagging an average gain of 1.5% for emerging-market peers, according to a Bloomberg index. Bonds due in 2035 yield 11.48%, up from 10.89% at the start of the year.
All eyes are now on the October election, a key gauge of whether Milei will get enough support to usher in a new wave of market-friendly reforms. But as investors wait, Congress has approved several bills that hike spending on social security and other programs that threaten to derail the libertarian’s austerity drive. His cabinet has also been hit by a bout of infighting. That’s left investors on tenter hooks, unconvinced by polls showing the government gaining in the elections.
“I think he’s going to do well, but each week is an eternity,” said Joaquin Bagues, managing director at Buenos Aires-based Grit Capital Group. “Investors are in wait-and-see mode to see how he does and if he has the capacity to transform that power into reforms.”
Argentina Rally Has Lost Steam After 2024 Surge
Source: Bloomberg
Milei is expected to win about 36% of the total votes, compared with 22% for the opposition Peronist movement, according to a July survey from Poliarquia. His approval rating stood at 53%.
Still, “the market is not yet willing to price in a Milei victory,” said Matias Montes, head of strategy at EMFI Securities.
‘Dumb Traitor’
Since coming to office in December 2023, Milei has pushed the budget balance into surplus for the first time in 15 years and brought monthly inflation to four-year lows, helping to revive economic growth. Ratings firms have rewarded his government with three credit upgrades in just seven months.
The president has promised to veto bills approved by congress that boost spending on pensions and disability aid. If lawmakers round up the two thirds support needed to overturn his veto, those bills would add spending worth about 2.5% of gross domestic product, according to the economy ministry, pushing the government into a deficit again.
“The market still loves the fiscal adjustment,” said Graham Stock, senior emerging-markets sovereign strategist with RBC Bluebay. “It just wants to be reassured that it is sustainable.”
And just as Milei’s party needs to show a united front, the cabinet has started bickering. Vice President Victoria Villarruel, questioned Milei’s spending on international travel and intelligence services after he accused her of colluding with Congress to raise pensions. In turn, Milei called her a “dumb traitor” unable to do simple math.
Read more: Cracks Emerge in Milei’s Inner Circle Over Ruling Party Hopefuls
Those close to the strategist behind Milei’s 2023 election victory, Santiago Caputo, have also questioned decisions of the president’s sister, Karina, revealing a split in his inner circle.
Elections
Argentines go to the polls on Oct. 26 to elect half of the 257 seats in the lower house and a third of the 72 seats in the senate. To ensure the opposition can’t block the presidential veto in either chamber, Milei’s La Libertad Avanza would need to win an extra 18 seats in the senate and 47 in the lower house. A good showing would boost Milei’s leverage to secure help from other lawmakers, including former president Mauricio Macri’s PRO party.
The first test of Milei’s support comes in September when people vote in the legislative race for the populous Buenos Aires province.
“The top priority is securing first place at the national level,” said Juan Cruz Diaz, managing director at Cefeidas Group, an Argentina-based international advisory firm. “Second is achieving a symbolic victory in the province of Buenos Aires. And third, the margin of victory matters — results closer to 40% than 30% signal a win with strong authority.”
Argentina’s economic growth, which rebounded after last year’s recession, has slowed in the last few months. Milei has said he needs congress to pass the tax, pension and labor reforms he’s promised to boost floundering industries and attract foreign investment.
Net foreign currency reserves, meanwhile, remain at a negative $8.8 billion, close to the levels where they were when the country signed a $20-billion deal with the International Monetary Fund in April, according to one estimate by Buenos Aires-based consultancy EcoGo. Under the agreement, reserves should have risen to around negative $2.9 billion by June, according to EcoGo.
Still, any concerns over growth and reserves will likely take a back seat if Milei gets a strong showing in October’s election, Montes said. A victory could even open a window for the country to issue dollar debt before the January bond maturities — it would be Argentina’s first hard currency debt sale, not including the most recent restructuring, since 2020.
“If he continues to maintain the fiscal anchor and adds success in the political arena, Milei could regain access to the market,” he said
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