Only in Argentina: Junk-Rated Bonds Yield Less Than US Treasuries

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(Bloomberg) — For all of President Javier Milei’s libertarian reforms, there are still all sorts of byzantine financial rules in place, like restrictions on lending and moving money overseas, that are creating distortions in Argentina’s capital markets.

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The most prominent of those distortions right now: The sudden rush by local companies to lock in interest rates on dollar-denominated bonds that are below what US Treasury bonds pay.

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Lender Banco Supervielle sold $20 million of one-year local notes in May at an interest rate of 3.25%, below comparable Treasury yields of around 4%. Oil producer YPF SA placed $122 million in a 2030 note at a 5.5% rate in the local market last month. The government raised $500 million this month through dollar bonds in the local market — one-year notes maturing in 2027 were sold to yield 5%, just above comparable US Treasury yields.

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Argentina, which has defaulted multiple times on its sovereign debt, finds itself awash with greenbacks amid a surge in agricultural exports — and lingering capital controls that keep those dollars largely trapped in the country. The abundance of local dollar liquidity has pushed borrowing costs lower onshore, enabling the government to sell debt at lower yields at home, rather than looking abroad, helping to finance debt repayments due later this year.

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The low borrowing costs are, of course, an oddity — not a signal investors see Argentine companies are less risky than the US government. Traders scooping up those bonds have to account for currency decline expectations as well as losses tied to inflation, which remains among the highest in the world at 32.4%. In global markets, Argentina still faces high borrowing costs, which has kept the government from tapping offshore investors. But it’s a window into just how distorted the economy remains, with capital controls and bank lending restrictions creating pricing distortions. 

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“Exchange controls have left captive dollars searching for yield,” said Juan Pedro Mazza, senior institutional sales trader at the brokerage Cohen SA. That has created “an opportunity for companies and the government to borrow locally at cheaper levels.”

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Local-law dollar corporate bonds yielded an average of 4.8% across all maturities as of May 15, compared with roughly 7.4% for similar foreign-law debt, according to secondary-market data compiled by Cohen.

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The corporate sales are small when compared to sizes placed in global markets, and short in duration, which signals there’s only so much the local market can absorb. And the same companies continue to pay significantly higher rates on larger and longer-dated foreign-law bonds sold abroad. YPF paid 8.1% to tap international investors on a $550 million bond sale earlier this year. 

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Dollar Flush

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The persistence of low rates signals there is still excess dollar liquidity in the local market, Mazza said. Agricultural exports, energy revenue and a wave of corporate debt sales overseas have all fueled inflows, while retail dollar deposits have climbed to two-decade highs under Milei.