Executive Summary

We remain bullish on Argentine sovereign debt, despite recent volatility in the country’s risk spread. After reaching a low of 575bps in mid-January, sovereign spreads widened back to 675bps, reflecting domestic, global, and valuation-related pressures. However, improved weather conditions, stronger commodity prices, and easing global risks suggest the worst of the selloff is behind us. For spreads to reach new lows, the government must sustain its fiscal surplus, navigate the midterm elections successfully, and rebuild reserves. While short-term bonds offer a more balanced risk-reward profile, the long end presents higher return potential if spreads tighten to 400bps. On the Central Bank curve, we see limited value in most BOPREAL securities given their weaker investor protections but identify compelling opportunities in Strip A for near-term gains and Strip B as a conservative alternative to sovereign bonds.

A stable exchange rate gap, supported by Central Bank interventions, keeps the carry trade attractive in the short term, offering solid USD returns. However, the risk remains asymmetric, with potential losses if the gap widens. Given the market’s pricing inconsistencies, we see a strong opportunity in dual bonds, which provide built-in protection without additional cost. We recommend rotating out of Lecaps/Boncaps into dual bonds and maintaining dollar-linked instruments, which offer high upside in a potential exchange rate unification. For inflation hedge, we favor short-term CER bonds, as current market breakeven rates underestimate inflation risks.

Fiscal discipline and expenditure cuts continue to support Argentina’s provincial debt appeal. In 3Q24, sub-sovereign public accounts posted a financial surplus of 3.4% of total revenues, bringing the year-to-date surplus to 7.8%. This was achieved through a sharp 24% real reduction in expenditures, which more than offset an 18% revenue decline. Mendoza, Córdoba, and Jujuy remain among the top performers, with Jujuy leading in fiscal strength despite elevated debt levels. We continue to favor Mendoza 2029 for its solid surplus track record, Córdoba 2027 for its strong financial position and attractive yield, and Jujuy 2027 for its risk-adjusted return potential, supported by a manageable debt profile.

Corporates have lost relative attractiveness compared to sovereign bonds, but the primary market continues to offer compelling opportunities through yield premiums on new issuances. Despite this shift, the belly and long end of the corporate curve still provide value, with mid-7% yields supported by strong credit quality and ample liquidity. January saw USD 2.0 billion in new corporate debt placements, reinforcing investor demand. We favor Mastellone 2026 for its potential ownership transition, Pampa 2029 for its expansion in Neuquén and strong cash flow, YPF 2031 Unsecured for its dominant export position and liquidity, Transportadora Gas del Sur 2031 for its minimal leverage, and Vista 2035 for its leadership in Vaca Muerta and sustained production growth.

‍Sovereign Bonds (Treasury and Central Bank)

Treasury Yield Curve - General Overview:

In our last report Of Markets and Midterms: Argentina Fixed Income Opportunities, published in late December, Argentina’s sovereign risk spread stood at 680bps. Since then, the index has exhibited significant volatility. Through mid-January, the Argentine rally extended further, driving the country risk spread down to 575bps—a new low under the Milei administration. However, from that point onward, Argentine assets faced a sharp selloff, pushing the spread back to 675bps, effectively returning to its starting point.

The deterioration in market dynamics was driven by a range of factors: domestic (a weaker outlook for the 2024/2025 harvest), global (Trump’s tariff rhetoric), and financial (Argentine debt had already appeared somewhat expensive). For now, these risks seem to be contained. Recent weeks have seen improved weather conditions, with rainfall suggesting the harvest may be slightly weaker than in the 2023/2024 cycle, though not materially worse. Globally, soybean prices have strengthened, pressure on emerging market currencies—particularly the Brazilian real—has eased, and Trump’s stance appears to have been overstated. In terms of valuations, bond yields have adjusted significantly higher, with some issues now approaching 14% annually.

Despite the negative market sentiment, we maintain a constructive outlook on Argentine debt. For Argentina’s spread to reach new lows, we believe the government must meet three key conditions:

1)  Maintain Fiscal Surplus. We view it as highly unlikely that the government will abandon its commitment to fiscal discipline, which remains the cornerstone of its economic program. However, we anticipate the fiscal surplus in 2025 will be somewhat lower than in 2024, reflecting headwinds such as weaker tax revenues due to the drought, the frontloading of wealth tax collections in 2024, and payments associated with the BOPREAL instrument. 

2)  Perform Well in the Midterm Elections. So far, the administration’s popularity remains robust. According to UTDT’s Government Confidence Index, President Milei’s approval rating stands at 52%. While the $LIBRA case may dent public perception to some extent, we believe this will be offset by declining inflation and a gradual recovery in wages and employment. 

3)  Build Reserves. This poses the most significant challenge, given the impact of real exchange rate appreciation and global uncertainty. Nevertheless, we expect reserves to remain stable in 2025, supported by financial account inflows, a moderate harvest, and a growing energy surplus—factors that should help offset current account pressures. In this regard, both the government and the IMF have signaled substantial progress toward a new agreement involving fresh funding. That said, ensuring long-term sustainability will require the government to advance meaningfully toward lifting foreign exchange controls in 2025. 

At current price levels, we suggest a slightly larger allocation to the long end, as it offers the highest total return potential. In our base case scenario, where country risk declines to 400bps over the next twelve months, these bonds would deliver a total return of 25% versus 22% for the short end. However, the short end presents a more balanced risk-reward profile, supported by its aggressive cash flow dynamics. If country risk remains at current levels, short-end bonds would generate a 16% return (versus 11% for the long end), while in a scenario where country risk rises to 1000bps, they would still return 12% (compared to 6% for the long end).

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

With Argentina’s country risk premium near 700 basis points, sovereign bonds have regained relative attractiveness compared to Central Bank-issued BOPREAL securities. As an illustrative example, the BOPREAL 1-D currently offers an annualized yield of 11.3%, trailing 180 basis points behind the 12.9% yield on the AL30 sovereign bond, despite both instruments exhibiting comparable durations.

At prevailing prices, we find limited value in most BCRA bonds, as we continue to see no meaningful premium for assuming it’s credit risk. The central bank’s historical lack of independence raises concerns over its ability to honor obligations in the event of sovereign distress. Furthermore, BOPREAL bonds governed under Argentine law provide weaker investor protection than sovereign bonds issued under New York law. In this context, the Treasury even demonstrated capacity to prepay obligations—evidenced by the early redemption of January 2025 maturities—highlighting its superior access to foreign currency relative to the monetary authority.

However, we continue to identify compelling value in Strip B, which we view as a more conservative alternative to the ARGENTINA 2030 (Argentine Law). At a current price of $89.8, the bond offers an attractive annualized yield of 14.8%, assuming the April 2026 put option is exercised under a scenario with no FX misalignment, consistent with recent statements from President Milei.

Moreover, we see meaningful upside in Strip A. We expect it to deliver a direct yield of approximately 3.4% over a 2-3 month horizon, implying a yield-to-maturity range of ~18% to ~14%. While bondholders without tax obligations will likely need to exit their positions at a discount, we anticipate this discount to remain contained, in the range of 3.0%. Notably, May and June represent pivotal months for corporate income tax settlements, accounting for nearly 20% of the annual revenue generated by this tax. For a more detailed view on positioning within BOPREAL 1-A, we encourage investors to refer to our prior report Of Markets and Midterms: Argentina Fixed Income Opportunities. 

Top Picks:

BONAR 2038 (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. The Argentine law bond is trading at a 5.0% discount relative to its NY law equivalent.

GLOBAL 2030 (YTM 12,8%, Price $73,5, MD 2,4). Our ideal candidate to aim for a curve steepening.

BOPREAL Series 1 – Strip A (Price $96,3, MD 0,3). We see significant value in Strip A, with expected returns around 3.4% over 2 to 3 months.

BOPREAL Series 1 – Strip B (YTM 14,8%, Price $89,8, MD 1,2). As discussed above, Strip B represents a conservative alternative for the Argentinian trade, yet it still offers a high yield of 14,8%. 

Local Currency

General Overview: A stable gap thanks to Central Bank´s financial FX interventions

In the short term, we expect the carry trade to continue offering positive returns in USD. Currently, the exchange rate gap stands at 15%, and we project it will remain at similar levels, supported by the Central Bank interventions. If the gap remains at its current level, the return would be significantly higher, reaching 1.2% effective monthly rate (EMR), equivalent to a 15.8% YTM.

However, it’s an asymmetric game: if the exchange rate gap were to rise to 20%, losses could erase all previously gained profits. Specifically, the monthly loss would be 2.6%, equivalent to 27.4% annually. This means that investing in ARS remains risky, but with the potential for high returns.

Given that the Central Bank is actively intervening to contain the gap and continues to purchase dollars, we believe it is worth the risk. Additionally, the current gap stands at 15%, while it usually hovers around 12%, meaning there is room for further gains if the gap compresses.

Currently, the Lecap curve appears slightly inverted, offering yields around 2.3% (EMR) for the first half of 2025 and approximately 2.2% (EMR) thereafter. This suggests that the market does not anticipate a significant decline in nominal rates until early 2027. However, this is inconsistent with the long-term disinflation expectations reflected in both market pricing and the REM survey, indicating that this nearly flat slope likely results from the market demanding a high premium for fixing a rate.

This reinforces a strong opportunity for dual bonds, whose rates trade in line with Boncaps of the same maturity. This presents a contradictory scenario: on one hand, the market demands a rate premium to extend maturities and hedge against higher short-term rates, yet at the same time, it offers no premium for dual bonds, despite their built-in protection against that very risk. Given these circumstances, we recommend selling Lecaps/Boncaps and rotating into dual bonds, which currently stand out as the best investment option in the ARS universe.

Regarding FX hedging, we recommend dollar-linked instruments. These securities are tied to the official fx and, with the government promising an exchange rate unification at some point in 2025, they offer a very high potential in USD. In a unification scenario a dollar-linked bond with maturity in 2026 offers a direct return of 24.9% in USD, which means an annual return of 17.8%.

For CER bonds, we favor the short end of the curve. Market pricing implies an average breakeven inflation of 1.9% m/m until April, below our projections of 2.1% m/m. Additionally, in the first week of February, cattle prices at the Liniers Market rose 10% m/m, which could impact inflation, similar to what was observed in December 2024. If this trend continues, the increase in meat prices could add 0.5 pp to February’s inflation, pushing the monthly rise to 2.3% m/m.

Top picks:

Inflation Linked June 2025 (Inflation +2.9%  MD 0.3)

Dual Bond March 2026 (EMR 2.1%)

Dual Bond December 2026 (EMR 2.0%)

Devaluation Linked June 2026 (Devaluation +8%)

‍Subsovereign Bonds. General Overview: 3Q24 results published.

The Ministry of Economy has released updated fiscal data for Argentina’s provinces for 3Q24. Sub-sovereign public accounts exhibited robust performance during the period, posting a primary surplus of 5.3% of total revenues and a financial surplus of 3.4%.

As a result, over the first nine months of 2024, Argentine provinces accumulated a primary surplus equivalent to 9.8% of total revenues and a financial surplus of 7.8%. This remarkable fiscal strength reflects a 24% real reduction in expenditures, which offset an 18% decline in revenues. Consequently, the year-to-date fiscal position is tracking closely with 2022, which closed with a financial surplus of 1.9%.

Top Picks:

Mendoza 2029 (YTM 9,2%, Price $93,8, MD 1,8): 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 financial track record and, among the 14 bond-issuing provinces, it presented the fifth best fiscal result (15% of total revenues) in the last twelve months. 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 3Q24, cumulative in 2024 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.

‍Corporate Yield Curve

General Overview: Opportunities in the Primary Market

The rise in country risk encourages a shift towards greater exposure to sovereign credits, which may offer a more compelling risk-reward profile given the current macroeconomic environment. Despite this, we continue to see attractive opportunities in the belly and long end of the corporate curve, where yields in the mid-7% range are accompanied by strong credit quality and ample liquidity, supported by substantial debt issuance.

We recommend seeking higher yields in the primary market, where new issuances consistently offer rate premiums to attract foreign investors. As the chart below illustrates, primary market placements have persistently outperformed YPF’s 2029 bond in terms of offered rates.

The primary corporate debt market remained very active in January. Issuances totaled USD 2.0 billion, leaving it only to the USD 2.1 billion issued in October 2024. Notable transactions included YPF's 9-year bond at 8.250% for USD 1.1 billion and Tecpetrol's 8-year bond at 7.625% for USD 0.4 billion.

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Top Picks:

Mastellone 2026 (YTM 8.0%, Price $103,7 MD 1.3): 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 $103.8; MD 3.3):  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 Unsecured (YTM 7.8%; Price $104.7; MD 4.8): 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.

Transportadora Gas del Sur 2031 (YTM 7.4%; Price $105,3; MD 4.9):  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. 

Vista 2035 (YTM 7.7%; Price $99,5; MD 7.2): 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.