Clarity on pesos, uncertainty on dollars.

Country risk rose despite lower US rates, with 2027 dollar financing at the center of market doubts

The US Treasury yield fell 15 bps and country risk still rose 59 bps, to 648. With core inflation at 1.7% and the surplus intact, the market stopped charging Argentina for the external backdrop and started charging it for the 2027 dollars. Over the week, the 10-year Treasury yield fell from 5.24% to 5.09%, yet country risk rose in each of the four sessions and ended 7 bps below the year's high. Our reading is that the market isolated the problem: the world helped through rates, local data were acceptable, and yet the spread widened. What is being priced is not peso solvency, which the surplus demonstrates month after month, but the ability to obtain the 2027 dollars, which still have no defined source.

International outlook: a rate drop that is not good news

In September, US CPI rose 0.6% m/m and 3.7% y/y, one tenth above expectations, with core at 2.6%. The next day, wholesale prices climbed 6.3% y/y, the highest reading since 2022. Even so, on Thursday the 10-year yield posted its largest one-day drop in six weeks. The explanation was in equities: the Nasdaq fell 4.5% and the S&P 500 1.9%, its worst week since June, on doubts about the profitability and financing of AI investment. It was a flight to quality, not an improvement in inflation.

The Fed holds its stance

The Fed did not change its diagnosis. Kevin Warsh avoided anticipating decisions and pointed to October and December as decision points. Futures assign a probability of more than 80% to a pause on October 28, but most expect another hike in December, from the current 3.75%-4.00% range. In our view, the long rate is in a fragile equilibrium: it is falling out of fear, while inflation keeps providing arguments to raise it. For Argentina, the relevant channel was not the rate but risk appetite. When yields fall because investors flee risky assets, higher-beta credits lose value even as the base rate declines: in the same week, the bonds of a data center operator went to yield more than 15%. This is the exception to the rule that lower rates favor emerging markets: they do so when they fall because of lower inflation, not risk aversion.

Oil, back at the center

Brent closed at USD 109.86 (+4.9% weekly), its highest level since May, and WTI gained 10.4%, to USD 101.41, after attacks on at least nine vessels around Hormuz, a Houthi missile against the Saudi port of Yanbu and a sharp drop in US inventories. Crude is currently the main source of US inflation and, therefore, of the hike priced in for December. For Argentina the effect is twofold: it improves the energy balance (YPF's ADR rose 4.1%), but it makes gas subsidies more expensive, which the Ministry of Economy cited in explaining September's spending, and it pressures prices: wholesale inflation accelerated to 3.2%, driven by oil and gas.

Argentine outlook: core inflation found a floor

September CPI rose 1.9% (1.93%), versus 1.7% in August and somewhat above the 1.8% we expected, though in line with the REM; y/y inflation fell to 33.4%. The composition is better than the headline: core inflation fell from 1.8% to 1.7%, while seasonal and regulated prices rose 2.9% and 2.3%, led by Housing, water, electricity and gas (3.1%). Our interpretation is that disinflation has not reversed but has stalled: core inflation of 1.7% a month is still equivalent to about 22% annualized, and energy keeps regulated prices above 2%.

Surplus: firm in level, demanding in target

In September the National Public Sector recorded a primary surplus of $1.43 trillion and a financial surplus of $977,173 million, with primary spending 0.9% lower in real terms. Over nine months it has accumulated a primary surplus of 1.2% of GDP, 0.2 pp below the 1.4% target agreed with the IMF, and December is usually in deficit: October and November will need to deliver additional effort. In addition, the cumulative result is lower in real terms than in 2025, and in September it relied on $516,340 million in property income, a less regular source than tax revenue.

Country risk: the Bonar 2029 signal

Wednesday the 14th's auction sums up our thesis. The Treasury obtained a 136% peso rollover (it awarded $6.61 trillion against maturities of $4.86 trillion), and about 59% was placed in securities maturing in 2028 and 2029, already under the next administration. In the same operation, the Finance Secretariat left out the dollar Bonar 2029, intended to cover part of the January 9 payment to Globals holders, because its implied rate was around 12%. Investors lend pesos beyond 2027, but charge dearly for dollars. That asymmetry is the heart of the problem: the surplus generates pesos, and the debt that worries the market is paid in dollars.

The BCRA keeps buying, but the market wants more

The official response is to buy those dollars in the market, and the week's dynamics supported that strategy: the BCRA bought USD 291M on Tuesday, the largest amount since late July, has accumulated more than USD 900M in October and took gross reserves above USD 50 billion, with the wholesale exchange rate stable near $1,514. But the market distinguishes between accumulating reserves in a month of abundant supply, sustained by agribusiness, energy and corporate and provincial issuance, and having the 2027 maturities secured. The Merval rose 0.6% in pesos but fell 0.1% in dollars, with banks among the hardest hit.

What changed

The Brazilian relief ran out, exposing the factor that weighs most on the spread: 2027 foreign-currency financing. What did not change is the inflation diagnosis, stabilized near 2% a month, nor the fiscal one, in surplus but with a demanding target.

What we expect

Our base case is country risk between 600 and 660 bps until the Government defines how it will cover the dollar maturities, with the 10-year Treasury yield unlikely to move far from 5% while oil stays above USD 100. On the dollar curve, we maintain our preference for short over long tenors, which are more exposed to the 2027 premium. In pesos, with the exchange rate far from the band ceiling and the BCRA buying, the carry remains defensible, with a bias toward CER instruments as long as core inflation does not break below 1.7%.

Risks

On the upside: a credible definition of the source of the 2027 dollars, a Flávio Bolsonaro victory on October 25 that revives regional appetite, and a US-Iran agreement that lowers oil. On the downside: a Lula victory (in Quaest's first poll for the runoff he was two points behind, 44% vs. 46%), a Fed that brings forward to October the hike expected for December, or local October inflation above 2%.

What's ahead

The Brazilian runoff on the 25th and the Fed meeting on October 27-28 will set the external pulse. Locally, the next Treasury auction will show whether demand for post-2027 maturities holds; the pace of BCRA purchases will tell whether October's behavior is a trend or a seasonal effect; and any announcement on dollar financing will be the most relevant data point for country risk. If Argentina manages to convert its surplus pesos into secured dollars, the compression will stop depending on Brazil and Washington. If not, country risk will keep pricing the gap between a solvent State in pesos and a debtor with no defined source in dollars.