Tags: argentina | investors | yield | debt

Argentina Blazes Trail in Investor 'Search for Yield'

Argentina Blazes Trail in Investor 'Search for Yield'
(Dollar Photo Club)

Wednesday, 20 April 2016 10:16 AM Current | Bio | Archive

In today’s “search for yield” environment, it could be interesting taking notice Argentina sold USD $16.5 billion of sovereign debt for the first time since it defaulted in 2001 on USD $80 billion of debt. 

It was also the biggest emerging market debt issue "ever" while there were nearly USD $70 billion in orders for the bonds, which was more than 4 times the value of the debt issued.

The details of the debt issue are:
  • USD $2.75 billion worth of 3-year notes at 6.25 percent;
  • USD $4.5 billion of 5-year bills at 6.87 percent;
  • USD $6.5 billion of 10-year bonds at 7.5 percent, which is 1.50 percent higher than the average yield of 6 percent for the J.P. Morgan Emerging Markets Bond Global Diversified Index, but well below Brazil’s 10-year government bond that yielded 12.92 percent on April 18;
  • USD $2.75 billion of 30-year bonds at 7.62 percent.

Long-term investors that have interest in these kind of investments could do well not overlooking the fact that the Federal Reserve probably will start raising rates during this year, which should negatively affect the value of these kind of bonds in case they have to be sold before they come to maturity.

That said, tomorrow, April 21, the ECB will hold its monetary policy meeting. It is widely expected the ECB will keep its monetary policy as it is for the moment.

Nevertheless, it will be interesting to hear what ECB’s President Mario Draghi will to say at the press conference and in continuation after the ECB introduced on March 10 new series of targeted longer-term refinancing operations (TLTRO II) operations, which will be conducted in June, September and December 2016 and in March 2017 and whereby Euro area banks who take on loans at the ECB will have to pay an interest rate equal to the rate applied in the ECB's main refinancing operations (MROs) that stand now at 0.00 percent and that could go as low as the deposit facility rate that at present stands at -0.40 percent, which in clear language means the bank will be paid for taking on credit at the ECB.

Notwithstanding all that, negative interest rates have already given European banks an inclination to raise themselves the cost of borrowing for their clients. That’s by the way what happens in the Netherlands for instance.

For the value of the euro, and this is important for investors, with the TLTRO II, the ECB has clearly signaled that the Central Bank is giving absolute priority to encourage bank lending over actions to weaken the euro.

To put it simple, the TLTRO II is “de facto” a “capital control” that logically should strengthen the euro, all other things being equal.

Notwithstanding the TLTRO II still has to be applied, the euro has already strengthened against the dollar by about 5 percent since March 10, which has confused many investors, and that is fully understandable.

More confusing is the fact that the ECB lending survey for Q1 shows loan growth is losing steam caused in part by the banks themselves who are trying to control the effects of the whole ECB easy money undertaking.

We’ll see what Mr. Draghi will comment about all this during his press conference.

Please take care, it’s not sure, but tomorrow could be another day of high volatility as it has been the case on March 10 when TLTRO II was announced.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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In today’s “search for yield” markets environment it could be interesting taking notice Argentina sold USD $16.5 billion of sovereign debt for the first time since it defaulted in 2001 on USD $80 billion of debt.
argentina, investors, yield, debt
Wednesday, 20 April 2016 10:16 AM
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