Executive Summary

Javier Milei became president of Argentina in December, marking the world's first libertarian head of state. His Government has quickly delivered notable economic and political results, boosting Argentine assets, which are performing exceptionally well in 2024. Key financial indicators, including the sovereign country risk, Merval index, and foreign exchange gap, have returned to 2019 levels. Continued success depends on the Government's execution of its stabilization program, though significant risks remain due to external pressures and political instability. This report explores fixed-income investment opportunities in Argentina across four main areas: sovereign bonds (Treasury and Central Bank), local currency bonds, sub-sovereign bonds, and corporate bonds. 

Good risk-return ratio offered by Argentine sovereign bonds. With yields of 22% on the short end and 17% on the long end, the accrual itself provides a near 5.0% total return in 3 months. While positive fiscal measures, inflation control and a narrowing FX gap foster optimism, Central Bank’s negative reserves of USD 5 billion raise concerns. Bonds from the Central Bank (BOPREAL) offer less attractive pricing and weaker legal protections compared to Treasury NY Law bonds. Our top picks include the Argentina 2030 (NY Law) for its fast recovery schedule and the Argentina 2038 (Local Law) for its promising upside with limited downside.

Opportunities still exist in local currency under an exchange rate unification scenario. Inflation-linked CER bonds are favored, providing positive real yields between 6.0% and 10%, and attractive carry trade opportunities. Dollar-linked bonds are very attractive on an FX gap unification before 2025’s elections, while fixed-rate instruments present higher risks. We recommend inflation-linked bonds maturing in June 2025 and June 2026.

Provincial debt has become more appealing following impressive fiscal results in 1Q24, with provinces achieving a fiscal surplus of 13.6%, nearly twice last year’s figures. Neuquén and Santa Fe stood out, with Neuquén's fiscal improvement driven by a 20% increase in royalties and Santa Fe’s surplus resulting from a 30% cut in expenditures. Our top picks are Neuquén 2030 unsecured, Santa Fe 2027, and Córdoba 2029.

Corporate bonds have become expensive due to high demand from local investors. The recent Tax Amnesty may have further inflated these prices, leading to a reduction in yields and a narrower spread against other Latin American corporates despite ongoing economic risks. Top investment picks: YPF 2026 secured, Pampa 2027 and the new Transportadora Gas del Sur 2031.

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Sovereign Bonds (Treasury and Central Bank)

Treasury Yield Curve

General Overview: Great potential, but risks remains high

With the country risk still high at 1400 bps, Argentine bonds continue to offer significant return potential. Current yields on sovereign bonds are at 22% YTM for the front end and 17% YTM for the long end. The accrual on Argentine bonds is so high that, if rates remain at these levels, they would provide a total return between 4.0% and 5.0% in  the next three months. In an optimistic scenario, where the entire curve compresses to a YTM of 15% (above most CCC-rated countries), they could deliver a direct return between 10% and 20% without reinvesting coupons.

There are reasons to believe this is feasible: the government has achieved commendable results in fiscal policy, inflation control, and fx gap reduction without suffering a significant blow to its positive image. Moreover, the current international context of declining rates favors emerging economies like Argentina’s.

However, the Country's reserves present high risk. Central Bank’s net reserves are at a negative stock of USD 5 billion. Without a jump in the official fx, we estimate these may drop to negative USD 10 billion by year-end. Without reserves and access to external financing (due to high sovereign country risk and stringent financial restrictions), debt sustainability is at risk.

To alleviate concerns, the Treasury has advanced USD 1.528 billion to cover interest payments due in January 2025. For the remaining USD 3.2 billion in capital maturities, the government is seeking financing through a REPO agreement; however, this process is showing slow progress. Regardless of whether the REPO is secured or not, an adjustment in the exchange rate will be necessary sooner or later. For this reason, we see exchange rate unification as the key catalyst for a new rally in Argentine bonds.

Central Bank Yield Curve

General Overview: Too expensive

We prefer to avoid BOPREAL bonds issued by the Central Bank (BCRA), as they offer significantly less appealing prices compared to Treasury counterparts. Currently, the market pays 20 cents more for the BOPREAL strip D than for the Argentina 2030 bond with a similar life, while sacrificing 7 points in annualized yield.

Holding Central Bank bonds instead of Treasury bonds does not justify this differential. Given the historical lack of independence of the Argentine Central Bank, the value of this premium should be closer to 0.0%. Furthermore, the BOPREAL bonds were issued under Argentine law, providing weaker legal protection when compared to Treasury bonds issued under New York law. It would be unlikely for the Treasury to default, while the Central Bank keeps regular payments on its debt. There is no historical precedent to support this view.

‍Top Picks:

ARGENTINA 2030 NY Law (YTM 21.6%, Price $60.1, MD 2.3): We prefer the front end of the yield curve, as it better capitalizes on the government’s efforts to expedite payments in 2025. If the government successfully honors these payments, the 2030 bond will recover 28% of the investment, compared to 8.0% for the 2035 bond and 9.0% for the 2038 bond. Additionally, due to its high semiannual 8% amortization, 85% of the investment can be recovered under Milei’s Administration (versus 25% for the 2035 bond and 37% for the 2038 bond). This means that the January 2028 payment is the only one required outside of Milei’s current presidency to fully recover the investment. Its legislative spread against the 2030 Argentine Law bond is 1.9%.

ARGENTINA 2038 ARG Law (YTM 17.5%, Price $49.9, MD 4.8): The 2038 bond features a legislation spread of 4.3%, nearly twice the 2.3% average of other instruments. As a result, it stands out as our preferred option in the long-term segment. This segment has the advantage of being the best alternative for extreme scenarios: its long life provides significant upside potential in cases where the risk premium collapses, while its low potential limits downside risk in more pessimistic scenarios.

Local Currency

General Overview: Opportunities in view of an exchange rate unification

Local currency strategies have offered extraordinary returns in 2024. As an example, the 2026 fixed rate bond offered a total return in dollars of 104% YTD. Much of this return was explained by the stability in the blue-chip swap (BCS) that only rose 28% YTD. This means it appreciated by 50% YTD in real terms and the fx gap fell to 28% from 170% levels in mid-December 2023. With this, the financial fx returned in real terms to its 2019 level, prior to Macri’s electoral defeat in the 2019 elections which forced the reinstatement of financial restrictions (known as “cepo”).

Despite this big rally, there is still an argument in favor of the carry trade: the 30% gap could fall to 0.0% in the event of a unification and, in real terms, the dollar could continue to lose ground against inflation. The Argentine peso debt universe offers 3 main alternatives for carry trade strategies: fixed-rate, inflation-linked and dollar-linked.

In terms of risk-return ratio, our preferred option is to buy inflation-linked CER bonds. The inflation-linked curve offers positive real rates of around 6.0% to 2025 and around 10% from 2026 onwards. The success of the trade depends on the fx not outperforming inflation. Given that one-year CER rates (real YTM 7.0%) are higher than US Treasury rates (YTM 4.0%), the breakeven for the trade is a 2.9% rise in real terms one year from now.

Dollar-linked bonds are tied to the official fx and represent a more direct and simpler alternative. The yields of these bonds depend exclusively on variations in the fx gap and are independent of inflation levels. With their one-year rates currently at -2.0% levels, their breakeven against a U.S. Treasury is for the fx gap to fall to 21% by next year (from its current 28%). In our view, this appears to be an all-in on an exchange rate unification event so we prefer to remain inflation-linked.

Fixed rate investments will sustain under the scenario where the fx gap falls without a need for an adjustment in the official fx rate, which we see as highly unlikely. A one-year peso treasury bill trades at a YTM of 60%, which compares to a YTM of 4.0% for the U.S. Treasury. With a fixed devaluation scenario at 2.0%, the breakeven gap of the trade is 55%. If we add a 50% devaluation to lift financial restrictions, the breakeven gap is 3.0%. Both levels look extremely tight, and do not justify the high tail risk of the trade.

Top Picks:

Inflation-Linked June 2025 (Real Yield, YTM 7.5%, MD 0.7): As mentioned above, the CER curve is our favorite to capture the carry trade opportunity offered by the Argentine market. We prefer a short-life instrument, whose risk depends less on rate dynamics and more on macroeconomic dynamics.

Inflation-Linked June 2026 (Real Yield, YTM 9.7%, MD 1.6): With a real yield near double digits, this CER bond is a more aggressive alternative. Its long life allows it to capture a compression of the curve.

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Sub-Sovereign Bonds

General Overview: After a solid first-quarter fiscal performance in 2024, provincial debt regains its allure.

Despite cuts in transfers from the national government, provincial public accounts performed positively in 1Q24. In general terms, during the first 3 months of the year, the total revenues of the provinces experienced a 17% y.a. drop in real terms, while primary expenditure decreased by 25% y.a. in real terms. This greater reduction in spending compared to the fall in revenues allowed the primary result of the provincial public sector to reach a primary surplus of 16.5% and a fiscal surplus of 13.6% in revenues, almost doubling those recorded in the same period of the previous year.

With these solid fiscal numbers and double-digit yields, provincial debt is an extremely attractive option. Neuquén and Santa Fe stood out among the provinces with bonds due to their remarkable fiscal improvement. In the case of Neuquén, its financial surplus increased by 20 points over revenues, an improvement that can be attributed to a royalties’ growth of 20% in real terms. This increase allowed the province to move from a neutral fiscal result in the first quarter of 2023 to a financial surplus of 20% over revenues in 2024. For its part, Santa Fe achieved a similar increase in its financial surplus, thanks to a significant 30% cut in current expenditures in real terms.

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Top Picks:

Neuquén 2030 unsecured (YTM 11.4%, Price $89.6, MD 2.5): As mentioned above, Vaca Muerta is bolstering Neuquén’s fiscal income. We expect this trend to continue, which is great news for the Patagonian province’s debt. In particular, we prefer the 2030 unsecured bond, which offers a rate premium of 3.5 points over the secured alternative. With a 6.9% coupon and 7.7% semi-annual amortization, this bond breaks even in October 2028. 

Santa Fe 2027 (YTM 10.9%, Price $92.6, MD 1.8): Santa Fe offers an interesting risk-return ratio given the good character, low debt percentage (43% of total income) and solid fiscal numbers (10% surplus over total income). 

Córdoba 2029 (YTM 13.9%, Price $80.6, MD 3.0): Córdoba has a strong credit profile: among the 14 bond-issuing provinces, in 2023 it presented the 3^rd best fiscal result (3.0% of total revenues). On top of that, the province reported a surplus of 19% of total income for 1Q24, against 10% in 1Q23. Within the curve, we suggest stretching life and buying the 2029 long bond.

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‍Corporate Yield Curve

General Overview: Too expensive due to Tax Amnesty

Argentine corporate bonds are a safe haven for local investors, as it’s the closest instrument they have to a risk-free treasury. As a consequence, demand for local credit is highly inflated resulting unattractive to global investors.

This phenomenon may have been recently reinforced with the implementation  of the Tax Amnesty, which has triggered an extraordinary inflow of dollars into the local system. Since August, private deposits have grown by $3.3 billion (+18%). An important portion of these newly declared assets were invested in corporate bonds, as this investment alternative prevents a 5.0% penalty under the Tax Amnesty. Since July, corporate rates have fallen by 207 bps to their current 6.5% level.

At these prices, the yield spread against other Latin American corporates reached a minimum of 0.3%, well below the 3.0% spread it had at the beginning of the year. Even though Argentine companies' numbers are solid, the idiosyncratic risk of the country remains high and does not justify such a low spread. Consequently, we expect an underperformance of Argentine credits going forward.

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‍Top Picks:

YPF Secured 2026 (YTM 7.2%, Price $101.3, MD 1.3): In August 2024, YPF oil production increased by 15% y/y to 350,000 barrels per day and its gas production increased by 6.7% y/y to 237,000 barrels per day. Debt looks sustainable both in the short and long term: the company has USD 1 billion in Cash and regular access to financial markets to face maturities for USD 1.9 billion in the next 12 months. However, given the low yields we prefer a defensive stance in the front end of the curve with the 2026 secured bond which pays a high coupon of 9.0%.

Pampa 2027 (YTM 7.1%, Price $100.1, MD 1.9): Pampa’s gas production in the first eight months of 2024 averaged 84,000 barrels per day. This is a 32% increase against the same period of 2023. On top of that, the company is acquiring the entire Rincón de Aranda block in Neuquén, which is expected to start producing oil in 2027. As with YPF, we preferred to reduce duration and selected the 2026 bond with a coupon of 9.5%.

Transportadora Gas del Sur 2031 (YTM 7.9%, Price $103, MD 5.1): TGS is an energy company engaged in the treatment, processing and transportation of oil and gas in the South and West of the country. The company's leverage ratio is very low: 0.2x Debt-to-Assets, 0.4x Debt-to-Equity and 2.0x Debt-to-EBITDA. Given the low sustainability risk of its debt, we recommend the new 2031 bond with a coupon of 8.5% for those willing to extend duration.