Argentina under pressure; Jordan better; investors eye week of potential market catalysts

By Rebecca Melvin

New York, June 11 – Argentina’s bonds were under pressure on Monday as the Argentine peso resumed a weeks-long slide following news on Friday that the country inked a larger-than-expected credit line with the International Monetary Fund for $50 billion.

The financial backstop is aimed at allowing the Argentine government to continue financing itself despite the weak peso.

The longer-end of Argentina’s sovereign bond curve was down a point on average on Monday, while the shorter-end of the curve was down ¼ point to ½ point, a New York-based trader said.

One of the issues in focus was Argentina’s 7 5/8% note due 2046, which was down by a point to 91.30, the trader said.

Argentina’s 7 1/8% notes due 2117, or the century bond, was also down a point; to 85¾ bid, 86¼ offered.

Argentina’s new 2028 notes were down ½ point to 88¾, while the Argentina 2021 notes were down only 35 cents.

Trading volume in the dollar-denominated notes was not especially high but exhibited “a persistent downtrend,” the trader said.

Investors want to see some consolidation in the peso before things will improve, the trader said.

The Argentine peso dropped to more than 26 against the U.S. dollar on Monday, which was down from 25.28 at the end of Friday.

The Argentina central bank had said that it would step in to support the peso if weakened below 25, but it declined to intervene on Friday and Monday, and the peso weakened to 26.

“I think they will take action at 27, but we will have to wait and see,” the New York source said, adding that he thought the reason why it had not acted was because “they don’t want to see the peso go lower in an uncontrolled way.”

Argentina started to feel the brunt of the current situation at the end of April as a strengthening dollar coincided with hiccups in President Mauricio Macri’s economic reform initiatives. The situation deteriorated until on May 9 the country said that it would approach the IMF for a financial backstop. The promise of IMF support helped the market over the past month, but the palliative effects were not in force on Monday.

The IMF agreement is at the upper end of the $30 billion to $50 billion that analysts had been expecting, and the deal came together quickly, but the situation remains uncertain even though the Macri government will have enough money to make payments in the coming months, in spite of the peso.

Meanwhile, the country will be hard pressed to reach its fiscal spending target next year while Macri likely runs for re-election.

The Argentine IMF program has been closely watched because other emerging markets are faceting similar problems. Turkey and Indonesia have also seen their currencies weaken considerably and this has raised fears about potential contagion spreading among emerging markets.

Bonds from Argentina’s neighbor Brazil were down on Monday as well. But the bonds of the Hashemite Kingdom of Jordan were stronger after news that Saudi Arabia and its Gulf allies have promised $2.5 billion in support of Jordan’s monarchy after a wave of mass protests over high unemployment, rising prices and plans to broaden the income tax base were threatening the stability of the country.

The Jordan 7 3/8% notes due 2047 were up more than a point at 92.67.

Word on pricing of the Industrial and Commercial Bank of China Ltd.’s triple trancher came through after the deal for $500 million each of floating-rate notes due 2021 and 2023 and €500 million of floating-rate notes due 2021 priced last week.

The deals priced at par for yields of Libor plus 73 basis points, Libor plus 83 bps and mid-swaps plus 50 bps, respectively.

Otherwise, the emerging markets debt primary was quiet early Monday with no new announcements heard.

Despite a raft of expected central bank news and other events this week such as the summit between U.S. President Donald Trump and North Korean leader Kim Jong Un in Singapore on Tuesday, which could potentially move bond markets, there are deals expected to price this week, a London-based syndicate source said.

“The market is open,” the source said.

In the broader markets, U.S. Treasury yields were higher after Italian economy minister Giovanni Tria said on Sunday that Italy’s new coalition government does not intend to leave the euro and plans to focus on cutting debt.

U.S. bonds were also factoring in more supply expected this week and the impact of the Federal Open Market Committee’s two-day policy meeting, which is widely expected to conclude with a rate hike on Wednesday.

The European Central Bank is also meeting this week and expected to announce on Thursday the conclusion of its bond purchases program after September when authorization of its bond-buying program expires. And the Bank of Japan will also be meeting on Thursday and Friday.

The yield on the 10-year benchmark note was up to 2.966% on Monday from 2.935% on Friday.

Some expect more turbulence with the possibility of Fed rate raise, which would increase pressure on emerging markets and test the ability of some countries to repay dollar-denominated debt.

Higher U.S. bond yields and the stronger dollar has pushed currencies of several emerging markets countries to multiyear lows.

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