Hedge funds boost bets against Argentine government bonds

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Hedge funds have upped bets against Argentina’s bonds as the emergence of radical rightwing candidate Javier Milei has sparked investor fears that the country is on course to elect a leader who will struggle to govern in the throes of an economic crisis.

The total value of Argentina’s bonds borrowed by investors to wager on a fall in prices has jumped by 65 per cent since Milei, a self-described “anarcho-capitalist”, won a primary poll last month ahead of a presidential election in October.

His plans to radically cut public spending and dollarise the country’s ailing economy have shaken the country’s fixed income and currency markets. The value of short positions against Argentine bonds lent by international custodian banks is currently $41mn, a sharp increase from $25mn ahead the mid-August vote, according to data from S&P Global Market Intelligence.

While the numbers are small compared with the overall value of Argentina’s debt, the surge comes despite the fact the bonds already trade in deeply distressed territory.

Caution from international investors comes after a period of turmoil for Argentina’s teetering economy. Inflation is running above 113 per cent, foreign exchange reserves are at dangerously low levels and the peso has lost more than half of its value against the dollar over the past 12 months.

“Given the Argentine dire macroeconomic situation, there is no room for errors,” said Alejandro Arevalo, head of emerging markets debt at Jupiter Asset Management.

He added investors were worried about the difficulty Milei would have implementing much-needed reform policies without a majority in Congress or backing from Argentina’s powerful labour unions, as well as execution risks with Milei, an inexperienced and radical leader.

“The question is not so much whether the proposed reductions in public spending will trigger social protests, but rather how Milei will react to these protests,” Arevalo said.

Investors say the most market-friendly candidate is the more moderate rightwing Patricia Bullrich, who is also proposing a programme of fiscal consolidation. While Milei said he would dramatically cut government spending, his stance has raised concerns over the feasibility of his proposals.

“The dollarisation plan of the leading candidate, Javier Milei, is radical and problematic and it is unclear if it is even achievable or worthwhile,” said Paul Greer, emerging markets debt and FX portfolio manager at Fidelity International. “The market will have great difficulty dealing with this, if he attempts it.”

The primary election result has also extended a period of political paralysis. With the electorate split roughly three ways between Milei voters, the mainstream centre-right party and those of incumbent populist Peronists, October’s election is hanging by a thread and analysts say a run off in November is a near certainty.

Investors are worried about what could happen in Argentina between now and November, as the devaluation of the exchange rate puts even more pressure on the country’s spiralling inflation problem.

“A dire situation in the short term is probably going to get even more dire,” said Peter West, economic adviser at EM Funding. “I’m not predicting this will happen but there’s a chance Argentina could fall into hyper inflation — monthly inflation will probably be in double digits in the coming months.”

The price of Argentine dollar bonds fell as much as 15 per cent immediately after Milei won more than 30 per cent of the vote held on August 13, and the value of the peso on unofficial exchange rates weakened. The central bank responded quickly by devaluing its official exchange rate by as much as 18 per cent to 350 pesos per dollar, which helped bonds recover part of their losses.

The blue-chip swap rate, a free-floating exchange rate for international investors who buy stocks and bonds, has continued to weaken to more than 780 pesos to the dollar on Friday.