Executive Summary

The Argentine market is currently experiencing a historic rally, with all asset classes consistently reaching new record highs. At this juncture, the critical question is whether this euphoria is justified or driven by irrational exuberance. For the time being, this rally is underpinned by strong fundamentals, as the country continues to achieve positive developments across nearly all sectors. The government appears well-positioned to enter the 2025 elections amid a highly favorable economic environment, which could further fuel the rise in local bond prices. Given this backdrop, we remain optimistic that Argentina has not yet hit its natural ceiling—though it is certainly approaching it. Bonds still offer compelling value, with spreads exceeding those of peer emerging markets. Provincial debt stands out as an attractive option, offering solid yields with less exposure to sovereign risk. In the corporate bond segment, strong demand driven by the tax amnesty and substantial bond issuance has compressed yields, prompting us to seek opportunities at the longer end of the curve. Finally, while the carry trade is likely to continue generating positive returns, its risk-reward profile is becoming increasingly risky.

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We remain positive on sovereign credits ahead of 2025 legislative elections. Despite it’s strong rally, Argentine debt still offers upside potential, with spreads above peers like Pakistan and El Salvador. While short-term bonds are favored due to manageable risk and near-term disbursements, long-term bonds could outperform if the ruling party secures reelection and achieves economic stabilization. On the Central Bank curve, we are positive on strips A, B, and C, which appear to trade with an "exotic premium" due to their dual put options.

Carry trade is expected to remain profitable, but it’s risk-return profile is not very compelling. We stand neutral between CER and fixed-rate bonds, as breakevens align with projected inflation. Dollar-linked bonds are less attractive due to the government’s planned crawling peg reduction and limited liquidity at longer maturities.

Fiscal improvements, coupled with attractive yields, make provincial debt appealing. Provincial public accounts showed solid performance in 1Q24, with revenues declining 17% y/y in real terms but primary expenditures falling even further by 25%, enabling a significant fiscal surplus of 13.6% of revenues. Neuquén and Santa Fe stood out, with Neuquén benefitting from a 20% real growth in royalties and achieving a financial surplus of 20% over revenues, while Santa Fe cut expenditures by 30% in real terms to improve its fiscal position. These Top picks include Neuquén 2030 unsecured for its rate premium, Santa Fe 2027 for its strong fiscal metrics and low debt levels, and Córdoba 2027 for its high yield and robust fiscal surplus.

The current environment presents opportunities to extend duration in Argentinian Corporates. Long-end yields average 8% for companies with good credit profiles and limited risk. The extraordinary inflow of dollars from the Tax Amnesty has driven significant demand for corporate bonds, compressing yield spreads to historically low levels. This trend is expected to persist, supported by favorable global monetary conditions, reduced refinancing risks, and investor behavior tied to tax penalties. Key recommendations include Pampa 2029, backed by strong cash flows and growth in energy production; YPF 2031 Secured, supported by robust oil export growth and collateralization; and Transportadora Gas del Sur 2031, with solid financials and a competitive leverage ratio.

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Sovereign Bonds (Treasury and Central Bank)

Treasury Yield Curve - General Overview: We remain positive ahead of 2025 legislative elections

Since our last report, country risk has experienced a significant compression, nearly halving to its current level of 750bps (down from 1,400bps in the previous report). As a result, sovereign bond yields are now at 14% YTM for the short end and 12% YTM for the long end and Argentina could regain access to financial markets in 2025. 

This remarkable rally can be attributed to a variety of positive developments across nearly all fronts. Most notably, the country has demonstrated strong performance in its daily foreign exchange (FX) purchases, accumulating nearly USD 2.8 billion between October and November, a period during which most analysts (including us) expected substantial selling pressure. In addition, the government has achieved commendable results on the fiscal front, controlling inflation and reducing the FX gap without significant damage to its public image. Furthermore, the external environment has also been favorable, with declining global interest rates and the victory of Donald Trump (who has a good relationship with President Milei).

Given that we expect these favorable indicators to persist into 2025, we remain positive on Argentine debt. This outlook is particularly relevant as we approach the 2025 elections, where the government could have a strong electoral performance, bolstered by a sustained reduction in inflation.

Argentina’s success has not been fully priced in, and the debt still presents potential upside. Argentina’s weighted Z-spread (a proxy of country risk) currently stands at 776 bps, still higher than those of similar emerging market economies such as Pakistan (692 bps), Nigeria (548 bps), and El Salvador (444 bps). Should spreads compress to these levels, Argentine bonds could see an upside of between 12% and 35% over the next 12 months. If yields were to remain at current levels, Argentine bonds would offer an average total return of 11%.

However, we acknowledge that upside has become much more limited; which opens a window to close positions. As mentioned above, Argentinian rates are nearing their natural floor, which means potential returns are considerably lower than they were a few months ago. Additionally, market euphoria may be leading investors to ignore the underlying risks of the economic program: 1) Net reserves remain at a negative balance of USD 4. 300 M while the multilateral real exchange rate has already returned to its level of late November 2023; 2) the recovery of activity and wages remains slow, which could impact the 2025 electoral outcome and 3) In addition, the Government needs to manage interest rates with great caution: they should be high enough to incentivize investments in pesos, but not too high, as an excessive increase could threaten fiscal sustainability.

Flow supports the long end, caution advises favoring the short end. The short end sees the majority of disbursements (50%-61%) occurring during Milei's administration, while the long end extends payments into future administrations, with only 7%-17% falling due by the end of 2027. In a bullish scenario where the ruling party secures victory in the 2025 elections and achieves meaningful economic stabilization, the market is likely to start pricing in the prospect of Milei's reelection in 2027. Under such conditions, the yield discount for longer maturities could converge with that of shorter durations, significantly boosting the relative performance of long-end bonds. However, if uncertainty around the 2025 electoral remains high, we expect the market to demand an additional risk premium for longer maturities, thereby favoring investments in the front end of the curve.

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Central Bank Yield Curve - General Overview: Value in Strips A to C

In our last report, we argued there was little value in BOPREAL bonds issued by the Central Bank of Argentina (BCRA). This has proven to be the right call. Since then, Treasury bonds clearly outperformed: they offered returns between 18% and 37%; while Central Bank bonds gained between 2% and 10%. 

With this, spreads have compressed to a more reasonable level. The market now pays 9 extra cents for the D-strip than for the 2030 NY bond (against 15 cents in our previous report), which represents sacrificing 0,7 pp of annualized yield (against the previous 5,2 pp).

We still see no premium in having the Central Bank as an issuer. Its historical lack of independence makes it unlikely to honor commitments if the Treasury defaults. Moreover, BOPREAL bonds under Argentine law offer weaker protection than Treasury bonds under New York law. The Treasury’s ability to prepay obligations, as seen with January 2025 maturities, underscores its priority access to foreign currency over the Central Bank. 

However, we value the fact that all BOPREAL’s payments are due within Milei’s administration. Considering political risk, one could argue that payments maturing before the 2027 presidential elections should be subject to a lower discount rate compared to those maturing afterward.

We are particularly favorable toward strips A, B, and C of the first series. Their elevated yields are likely attributed to their complex and unconventional structure, which presents challenges for accurate valuation. These bonds stand out for including a dual put option exercisable starting in April 2025, 2026, and 2027, respectively. In the event of a currency unification, the put is settled in pesos at the official exchange rate. Conversely, if the exchange rate gap persists, the put is settled at the local financial fx against taxes owed in pesos. In the latter scenario, bondholders without tax liabilities would need to sell the bond at a discount to others who do have taxes to offset. Nonetheless, we believe such a discount would be limited, as April coincides with the peak season for corporate income tax payments.

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Top Picks:

ARGENTINA 2029 Arg Law (YTM 14,6%, Price $75,0, MD 1,9): Due to its high semiannual 10% amortization, the 2030 bond recovers 81% of the investment under Milei’s administration. This means that 2028’s payment are the only ones required outside of Milei’s current presidency to fully recover the investment. Its legislative spread against the 2029 NY Law bond is 3.6%, and it triples the 1,1% of other instruments.

ARGENTINA 2038 NY Law (YTM 11,8%, Price $68,0, MD 5,2): The 2038 bond stands out as our preferred option in the long-term segment because it outperforms the rest of the long-end in all scenarios with exception of the two most extremes (convergence to El Salvador and prices back to 50 cents).

BOPREAL Series 1 – Strip A (YTM 13,7%, Price $96,7, MD 0,4): The shortest bond in Series 1 becomes exercisable starting in April 2025. Assuming the exchange rate gap remains by that time, the bond may need to be sold at a discount. At a modest 1.0% discount, the yield to maturity (YTM) stands at 11.2%. With a moderate 2.5% discount, the YTM drops to 7.5%. Under a steep 5.0% discount, the YTM falls significantly to 1.7%.

BOPREAL Series 1 – Strip C (YTM 13,3%, Price $84,1, MD 2,2): Strip C repays its full principal in April 2027, with half settled in dollars and the other half through the exercise of the put option. By that time, foreign exchange restrictions are expected to have been lifted, significantly reducing the risk of selling at a discount compared to Strip A. Strip C currently trades at the same price as Strip D, which lacks the added benefit of the put option. 

Local Currency

General Overview: On the knife-edge

Peso-denominated strategies delivered strong performances since our last report, driven by lower peso interest rates and a narrowing fx gap to approximately 10%. Inflation-linked bonds (CER), our preferred instruments, led with dollar-denominated returns ranging from 19% to 47%. Fixed-rate instruments also performed well, posting gains between 19% and 38%, while dollar-linked bonds lagged with returns of 10% to 14%.

In the short term, we expect carry trade to continue to generate positive dollar returns, supported by the Central Bank's (BCRA) intervention in the financial fx market. This strategy has proven effective, as the mere expectation of intervention deters speculative activity and keeps dollar demand in check.

However, the risk-return profile of the carry trade looks very asymmetric. For instance, a 30-day Lecap currently offers a monthly rate of 2.9%. Assuming an exchange rate gap of 10% and an official devaluation rate of 2.0% per month until January, the dollar return would be 0.9% per month, or an annualized rate of YTM 11%. However, if the fx gap raises in five points to 15%, total return would result in a direct loss of 3,5%, which results in an annualized rate of YTM -42%. Would the fx gap return to it’s 33% average value in 2024, then direct dollar loses would amount to -16,6% in a month (YTM -89%).

Regarding instrument selection, we are indifferent between CER bonds and fixed-rate ones. Breakevens suggest inflation expectations consistent with our projections: 2.5% m/m in the last two months of 2024 (vs. 2,7% m/m , 21% annually in 2025, and 15% annually in 2026.

Lastly, dollar-linked bonds appear less appealing. The government plans to reduce the crawling peg to 1.0% monthly starting mid-January, significantly below the 2.3% m/m implied by breakevens through the end of 2025. Although a unified exchange rate is possible by late 2025, limited liquidity at these maturities undermines their attractiveness.

Top Picks:

Fixed Income LECAP January 2025 (YTM 41%, MD 0,7).

Inflation-Linked June 2025 (Real Yield, YTM 5,3%, MD 0,6).

Inflation-Linked June 2026 (Real Yield, YTM 8,1%, MD 1,5).

Fixed Income BONCAP October 2025 (YTM 36%, MD 0,7).

Subsovereign Bonds

General Overview: Good fiscal numbers and high yields.

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 near double-digit yields, provincial debt is an 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:

Neuquen 2030 unsecured (YTM 9,2%, Price $94,4, MD 2,5): As mentioned above, Vaca Muerta is bostering Neuquen’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 1,7 points over the secured alternative. 

Santa Fe 2027 (YTM 9,9%, Price $95,0, MD 1,7): 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 2027 (YTM 11,0%, Price $93,8, MD 1,5): Córdoba has a strong credit profile: among the 14 bond-issuing provinces, in 2023 it presented the 3rd best fiscal result (3% 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 the 2027 bond for it’s higher yield.

‍Corporate Yield Curve

General Overview: Opportunities to extend duration 

The Tax Amnesty triggered an extraordinary inflow of dollars into the local system. Since August, private deposits have grown by $18.8 billion (+78%). 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.

To capitalize on the current environment of high demand, local companies have significantly accelerated the issuance of new debt instruments. Since September, 48 new instruments have been issued, raising a total of USD 4 billion—over half of all placements in 2024 and nearly four times the total issued throughout 2023.

This robust demand has compressed yields, with the yield spread against the index of B-rated U.S. corporates reaching a low of -0.2%, well below the 1.7% average spread observed in the first half of the year.

We believe this spread is justified and likely to remain at current levels. Four key factors support this view:

1. Global Monetary Trends: A gradual decline in interest rates internationally, even after Trump's victory, provides a supportive backdrop.
2. Investor Behavior: Investors who purchased corporate bonds to avoid tax penalties under the repatriation program are expected to hold these instruments until early 2026, reducing the risk of medium-term selling pressure.
3. Improved Macroeconomic Outlook: Structural macroeconomic adjustments have enhanced Argentina’s business environment, fostering optimism among investors.
4. Deleveraging Effect: This year’s significant volume of corporate bond issuance has reduced refinancing risks over the next three years, maintaining low credit risk levels.

Given this outlook, we recommend positioning in the long end of the corporate curve, which offers good credits and higher yields comparable to shorter-dated instruments. These bonds currently offer IRRs around 8%, translating into a 2-3 percentage point premium over shorter-term instruments.

Top Picks:

Pampa 2029 (YTM 8.2%, Price $103.2, MD 1.9):  Pampa's gas production grew 37% in the second quarter and reached new record highs. In addition, the first wind turbines of its new wind farm were commercially commissioned. 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. Debt level is at 539M, its lowest historical debt level and the company has a very strong cash generation from electricity and gas supply.

YPF 2031 Secured (YTM 7.7%, Price $104.9, MD 5.0): As a result of the development of Vaca Muerta, YPF became the main oil exporter in Argentina. In the third quarter of the year, oil exports reached 40,000 barrels per day, which represents a 37% growth compared to the second quarter and a 111% y/y increase. 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. This instrument is collateralized against exports, so given the premium that this collateralized instrument has, we see it as cheap.

Transportadora Gas del Sur 2031 (YTM 7.6%, Price $104,4 MD 4.9): 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; to the point that Net Debt is at a negative stock of USD 122 M; which compares to a USD 650 M EBITDA. We recommend the new 2031 bond with a coupon of 8.5% for those willing to extend duration.