General Outlook

Milei's Argentina closes 2024 with very positive results across almost all fronts, reinforcing a favorable environment for Argentine assets. Milei delivered on his "chainsaw" promise, achieving a primary surplus of 2.1% of GDP in the year's first eleven months. This fiscal anchor has been the cornerstone of the economic program: it has brought inflation down to 2.5% m/m (compared to 25.5% m/m in December 2023) and narrowed the exchange rate gap to 12% (vs. 160% pre-Milei). In the official fx market, the government has been purchasing dollars at a daily rate of $84 M over the past 30 days, accumulating $19.5 B for the year. 

Additionally, the real economy shows significant recovery: October 2024 activity levels exceeded November 2023 levels by 0.6%, real wages have seen seven consecutive months of recovery, and poverty is estimated to have fallen to 39% in Q3 2024 (vs. 55% in Q1 2024). This positive context is reflected in the government’s high approval ratings, which remain elevated above 50%, positioning it well for a strong performance in the 2025 midterm elections. 

However, risks to the economic program remain significant. With the devaluation pace currently at 2.0% m/m (and expected to drop to 1.0% m/m), the real exchange rate has already returned to its 2023 lows. This has reflected in the current account, which has been in deficit since June. With net reserves still at a negative balance of -$3,000 M, the government’s room to maintain an appreciated real exchange rate is extremely limited. 

The favorable macroeconomic backdrop could sustain the momentum in fixed income markets, particularly for sovereign and subsovereign debt, which offer higher yields. As for Corporate Credits, , the increased demand spurred by tax amnesty has led to compressed yields, encouraging investors to explore opportunities in longer maturities. Carry trade, while still profitable under the fx intervention scheme, now poses a precarious risk-reward balance. We believe Argentina’s assets still hold potential for upside, although the ceiling is coming into view.

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Executive Summary

We remain positive on Argentine sovereign credits ahead of the 2025 legislative elections. Despite recent gains, Argentine debt still offers significant upside, with spreads higher than peers like Angola and Nigeria. The 2025 midterm elections will be pivotal, as strong legislative results would validate economic reforms and strengthen La Libertad Avanza’s position. The flat yield curve favors short-term bonds due to manageable risk and near-term disbursements, while long-term bonds could outperform if the market starts pricing Milei’s reelection with high probabilities. On the Central Bank curve, we see value in Strip A for its short-term yield potential and in Strip C as a conservative alternative to Treasury bonds, both benefiting from all payments falling within Milei’s current term. 

Carry Trade should come back supported by the Central Bank's  interventions, but it’s risk-return profile remains unnatractive. Even in a conservative scenario where the fx gap stabilizes at 12.5%, the annualized return matches that of sovereign bonds, offering no additional compensation for the higher risk of significant losses if the fx gap widens. At current levels, we favor extended durations and remain indifferent between CER and fixed-rate bonds, with breakevens aligning with our inflation forecast of 25% for 2025.

Fiscal improvements and high yields maintain provincial debt's appeal. Provincial public accounts showed robust performance in 2Q24, with revenues declining 13% y/y in real terms but primary expenditures falling even further by 23%, leading to a financial surplus of 8.6% of total revenues. Top-performing provinces included Jujuy, with a fiscal surplus of 39%, and Neuquén, whose oil royalties rose to 33% of total revenues, bolstering its fiscal position. Preferred picks are Neuquén 2030 unsecured, Mendoza 2029, Córdoba 2027 and Jujuy 2027.

We maintain our recommendation to extend duration in Argentinian corporates. Long-end yields remain in the high 7s, supported by excellent credit quality and significant liquidity following record levels of corporate debt issuance. Four key factors sustain this favorable outlook: global monetary easing, demand stability driven by tax amnesty-related investor behavior, improved macroeconomic conditions, and reduced refinancing risks due to deleveraging. Key recommendations include Mastellone 2026, Pampa 2029, YPF 2031 Secured, Transportadora Gas del Sur 2031 and Vista 2035.

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Sovereign Bonds (Treasury and Central Bank)

Treasury Yield Curve - General Overview: Midterms Ahead

Since our last report (LINK), country risk fell by 70bps to 680bps, marking a new low under Milei's administration and returning to February 2019 levels. As a result, the yield curve is pretty much flat around YTM 11% and Argentina seems  very close to regaining access to financial markets in 2025. 

Argentina’s success has not been fully priced in, and the debt still presents interesting upside potential upside. Argentina’s weighted Z-spread (a proxy of country risk) currently stands at 707 bps, still higher than those of similar emerging market economies such as Angola (660 bps), Nigeria (522 bps), and El Salvador (433 bps). Should spreads compress to such these levels, Argentine bonds could see a respective average upsides of 11%, 17% or 24% over the next 12 months. If yields were to remain at current levels, Argentine bonds would offer an average total return of 9%.

The yield curve slope should steepen so that disbursements under Milei’s administration have a lower discount rate. This would favor the short end, which sees the majority of its disbursements (50%-61%) during Milei's administration, while the long end extends payments into future administrations, with only 7%-17% falling due by the end of 2027. 

However, the long end of the curve benefits from very positive scenarios, where the "level" effect of yield compression is expected to more than offset the impact of "slope" steepening. On top of that, the yield discount for longer maturities may converge toward that of shorter durations if the market starts pricing in the prospect of Milei's reelection in 2027. 

The 2025 midterm elections are shaping up to be the primary driver of Argentine asset performance. The critical variable to monitor will be the ruling coalition's results, as this will effectively gauge popular support for the current economic and political program. A clear legislative victory would be the most favorable scenario for the markets: it would validate the ongoing macroeconomic stabilization efforts, position La Libertad Avanza strongly for re-election in 2027 and significantly bolster its standing in Congress.

For now, the most likely scenario is a strong electoral outlook  the government. According to the UTDT Government Confidence Index, Milei’s approval rating stands at 53%, the highest for a first-year administration. The Argentine population seems to have placed greater value on lower inflation and a strong macroeconomic stabilization over the decline in activity and the erosion of real wages. With expectations of a sustained recovery in wages and the real economy in 2025, the government’s image is unlikely to face significant setbacks.

However, fx and activity risks could undermine the government’s standing ahead of the elections. First, as inflation becomes less of a concern, the average voter’s priorities are likely to shift toward economic activity. If this shift happens too quickly and the government fails to deliver tangible improvements in activity, Milei’s approval could weaken. Additionally, the high exchange rate risk inherent in the current economic program presents a significant threat: a devaluation, may reignite inflationary pressures and negatively impact economic activity. Lastly, unforeseen events could also adversely influence public opinion.

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

Central Bank bonds continue to "underperform" relative to their Treasury counterparts. Over the past 30 days, the BOPREAL gained 0.2%, five percentage points below Treasury bonds. As a result, their spreads have narrowed to much more reasonable levels: the C and D strips offer yields of 10%, just 1 percentage point below the similar-maturity ARGENTINA 2030.

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

In this sense, Strip C represents a conservative alternative to ARGENTINA 2030 Arg Law. The bond’s dual is pretty much free at $0.3 per $100.0 when compared to Strip D. Offering similar yields (11.6% vs. 12.4%) and duration (2.1% vs. 2.3) but having all its payments under Milei (vs. 50%). Assuming all payments are honored, when the BOPREAL put becomes effective  in April 2027 holders will be able to receive $112.5, which represents a direct yield of 28% with no reinvestment or 29% if cash flows are reinvested at the risk free rate. To break even, the 2030 bond should be priced at YTM 9% ($90) or at YTM 11% ($87) respectively. In our view, this is a little above face value so we prefer the Treasury bond.

We see a lot of value in Strip A, which we expect to offer a direct yield close to 5,0% over 5 to 7 months. Bondholders without tax obligations will need to sell their positions at a discount, though we expect this to be relatively modest around 3,0%. May and June are key months for companies’ Income Tax payments, with nearly 20% of the annual revenue of this tax coming  during this period. May and June collections are estimated to sum up between $4 or $6 billion, which represents between 4 and 6 times the remaining amount of the BCRA bond. But the Income tax accounts for only 30% of total expected revenue for 2025, so demand should be even higher. In any case, by year-end, total tax revenue from May will be 16x to 23x the bond's remaining value.

Top Picks:

ARGENTINA 2029 NY Law (YTM 14,6%, Price $75,0, MD 1,9). Ideal candidate to aim for a curve steepening, so that the discount rate for payments under Milei’s administration are lower than the subsequent ones. In this regard, the 2029 bond recovers 75% of its investment under Milei's administration, thanks to its aggressive amortization scheme of 10%.

ARGENTINA 2035 NY Law (YTM 11,2%, Price $68,1, MD 6,1). The 2038 bond stands out as the preferred option in our 12-month scenarios discussed above.

BOPREAL Series 1 – Strip A (YTM 22,9%, Price $94,1, MD 0,3). We see significant value in Strip A, with expected returns around 5.0% over 5 to 7 months, and anticipate modest discounts of around 3.0% for non-tax-exempt bondholders. May and June are critical for Income Tax payments, projected to generate $4–$6 billion, far exceeding the BCRA bond's remaining value and indicating strong demand through year-end.

BOPREAL Series 1 – Strip C (YTM 11,5%, Price $88,1, MD 2,2). As discussed above, Strip C represents a conservative alternative to ARGENTINA 2030 as it offers similar yields for a similar duration; although we still lean toward its Treasury counterpart.

Local Currency

General Overview: Financial Fx Interventions put a ceiling on the gap.

Peso-denominated strategies had a negative performance since our last report. Interest rates dropped after the Central Bank cut the Monetary Policy Rate to 32%, while the fx gap reached a low of 5% and then rebounded to its current 12% level. The overall result was negative: Fixed-rate instruments lost between -0.8% and -2.6%. CER bonds had a more mixed performance: gaining up to 1.2% but losing up to 6.1%. Meanwhile, dollar-linked bonds registered losses between 2.9% and 5.7%.

Carry Trade should come back supported by the Central Bank's  intervention in the financial fx market. As expected, the monetary authority is taking an active stance in setting a ceiling for the fx gap through interventions in the financial fx market. Given it decided to intervene with a 15% fx gap, it seems the economic team may be comfortable with an fx gap closer to 10%. This strategy has proven effective in previous months, as the mere expectation of intervention deters speculative activity and keeps dollar demand in check.

At this prices, the risk-return profile of the carry trade looks very asymmetric. For instance, a 30-day Lecap currently offers a monthly rate of 2.8%. Assuming the fx gap remains at 12,5%, the dollar return would be 0.9% per month, or an annualized rate of YTM 11% in line with Treasury bonds. However, if the fx gap raises in five points to 17,5%, total return would result in a direct loss of 3,4%, which results in an annualized rate of YTM -34%. Would the fx gap return to it’s 33% average value in 2024, then direct dollar loses would amount to -14,7% in a month (YTM -85%).

Regarding instrument selection, we like extended durations while we remain indifferent between CER bonds and fixed-rate ones. Breakevens signal a 20% inflation for 2025, in line with our projections of 25%.

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Top Picks:

Fixed Income LECAP 15 August 2025 (YTM 36%, MD 0,45).

Fixed Income BONCAP 13 February 2025 (YTM 32%, MD 1,15).

Inflation-Linked June 2025 (Inflation+7,2%, MD 0,5).

Inflation-Linked June 2026 (Inflation+8,8%, MD 1,4). 

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Subsovereign Bonds

General Overview: 2Q24 results published.

The Ministry of Economy of Argentina has updated the fiscal data for the provinces through 2Q24. 

As in the first three months of the year, provincial public accounts performed strongly in 2Q24, registering a primary surplus of 10.0% and a financial surplus of 8.6% of total revenues. As a result, in the first half of 2024, provinces accumulated a fiscal surplus of 10.6% of total revenues, the best result on record. This compares to a fiscal surplus of 0.3% in the first half of 2023 and 7.0% in 2022.

The improvement in provincial fiscal results was due to a decline in revenues offset by an even larger adjustment in spending. Specifically, total revenues fell 13% YoY in real terms, driven by an 11% YoY reduction in provincial revenues and a 15% YoY drop in transfers from the federal government (including an 8% YoY decrease in shared revenue and a 78% YoY reduction in discretionary transfers). On the expenditure side, primary spending decreased by 23% YoY, mainly due to a real contraction of 58% YoY in investment and 20% YoY in wages. As a result, provinces accumulated a fiscal surplus of 10.6% of total revenues in the first half of 2024, compared to 0.3% in the same period last year and 7.0% in 2022.

Among bond-issuing provinces, those with the best fiscal performance improvement (in fiscal results and as a share of total revenue) were Jujuy (39% in 2Q24 vs. 4% in 2Q23); Tierra del Fuego (17% vs. -14%); Mendoza (21% vs. -2%); and Neuquén (14% vs. -3%). In contrast, the provinces with the least improvement (or a deterioration) were City of Buenos Aires (10% in 2Q24 vs. 12% in 2Q23); Chaco (6% vs. 5%); and Santa Fe (5% vs. 3%).

Regarding the issuance of new debt, the City of Buenos Aires suspended the repurchase offer for its 2027 bond of up to USD 550 million, as the volume of offers received did not justify the operation. In parallel, the jurisdiction decided not to proceed with the issuance of new securities intended to finance the payment of these maturities.

Top Picks:

Neuquen 2030 unsecured (YTM 9,0%, Price $94,9, MD 2,4): Vaca Muerta keeps bostering Neuquen’s fiscal income and in the last twelve months Oil Royalties represented 33 percent of total income (compared to 30% and 27% one and two years prior respectively). The downside of this trend if the province’s greater exposure to fluctuations in oil prices. We prefer the 2030 unsecured bond, which offers a rate premium of 1,5 points over the secured alternative. 

Mendoza 2029 (YTM 9,6%, Price $92,5, MD 1,9): The province of Mendoza has reported strong fiscal results in 2024. By September, it has accumulated a financial surplus of $1.486 billion, which represents 13% of its revenues. This is significantly higher than the 5% surplus recorded by the same month in 2023 (an election year), but lower than the 19% surplus seen in September 2022. With this, the province is on track to finish the year with an accumulated surplus of around 5% of its revenues.

Córdoba 2027 (YTM 10,8%, Price $94,2, MD 1,5): Córdoba has a strong track record and, among the 14 bond-issuing provinces, in 2024 it presented the fifth best fiscal result (18% of total revenues). Within the curve, we suggest the 2027 bond for it’s higher yield.

Jujuy 2027 (YTM 12,8%, Price $95,1, MD 1,1).  The province of Jujuy reported the best fiscal results for any bond-issuing province in 2Q24, 1H24 and in the last twelve months. Jujuy’s higher yield is probably explained by it’s high debt of 44% of total income. However, we believe that this risk is limited given that 57% of its debt is with the national government, making it more manageable compared to obligations with private entities or multilateral organizations.

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‍Corporate Yield Curve

General Overview: Opportunities to extend duration 

The primary corporate debt market remained very active in December, marking the second-best month of the year in terms of financing. Issuances totaled USD 1.6 billion, second only to the USD 2.1 billion issued in October. Notable transactions included Vista Energy's 10-year bond at 7.625% for USD 660 million, Pampa Energía's 10-year bond at 7.875% for USD 360 million, and MSU Energy's debt exchange of USD 400 million (from the 2025 6.875% bond to the 2030 9.750% bond).

Overall, we recommend positioning in the belly/long end of the corporate curve, which offers yields in the high 7s, excelent credit quality and has significant liquidity following the large volume of debt issuances. We 

We believe duration exposure is justifies as yields are likely to remain at current levels. Four key factors support this view:

1. Global Monetary Trends: A gradual decline in global interest rates provides a supportive backdrop.
2. Investor Behavior: Investors who purchased corporate bonds to avoid tax penalties under the Tax Amnesty are expected to hold these instruments until early 2026, reducing the risk of a negative demand shock.
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.

For the short end of the corporate curve, we recommend sacrificing some credit quality in pursuit of higher returns. This allows us to obtain similar yields to the long end with reduced duration exposure, while still maintaining a good credit selection. In this regard, we highlight the Mastellone 2026 credit.

Top Picks:

Mastellone 2026 (YTM 8.3%, Price $103,8 MD 1.4): Arcor and Danone have a one-year window to exercise a call option granting them 51% ownership of the company. Meanwhile, the Mastellone family and the investment fund Dallpoint Investments hold a put option, also with a one-year term.

Pampa 2029 (YTM 8.2%; Price $103.3; MD 3.5):  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 remains low and the company has a very strong cash generation from electricity and gas supply.

YPF 2031 Secured (YTM 7.7%; Price $105.6; MD 4.5): As a result of the development of Vaca Muerta, YPF became the main oil exporter in Argentina. 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 7.8%; Price $103,8; MD 4.9):  he 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. 

Vista 2035 (YTM 7.8%; Price $103,8; MD 4.9): Vista is a leading shale oil company in Vaca Muerta with a robust inventory of up to 1,150 ready-to-drill wells. With proven reserves of 318.5 million barrels of oil equivalent (85% oil), Vista presented a strong production of 72,8 thousand barrels of oil equivalent per day (+42% vs. 2023) and reduced lifting costs to $4,5 per barrel of oil equivalent (-$0,6 vs. 2023). The company maintains a solid balance sheet, a net leverage ratio of 0.65x, and significant cash liquidity.