Argentina – a serial defaulter that’s mired once again in heated debt restructuring talks with creditors – may be the last place you’d expect to find negative-yielding bonds. But quirks of its capital markets have turned the country into a surprising hot spot.
Argentine companies issued a record US$596 million of dollar-linked bonds domestically in the past two months, and about a third now pay negative yields. Local investors are lapping them up, willing to accept losses in dollar terms because the notes’ peso payouts are adjusted to account for swings in the foreign-exchange rate. Pessimistic forecasts call for the peso to drop as much as 50 percent within two years, generating returns for investors that dwarf any costs they have to incur from receiving negative yields.
“The local market is valuing the need for a hedge against depreciation more than the credit risk of the issuer,” said Alejandro Haro, head of sales and private banking for Banco Comafi in Buenos Aires. “As long as it’s dollar linked, it’s in demand.”
In most countries, investors worried about local currency depreciation could buy dollars and purchase Treasuries that pay a positive yield.
But in Argentina, capital controls to stem dollar outflows limit citizens’ ability to buy greenbacks and block overseas companies from repatriating dividends. Saving in pesos is a money-losing affair with inflation forecast to surpass 40 percent this year.
Companies seeking to borrow on the cheap took advantage of the dynamic, with dollar-linked bond issuance soaring in May and June as expectations for a weaker currency ramped up.
YPF SA, the state-controlled oil producer, placed US$93 million of 18-month bonds with a zero-percent coupon that now yield minus 1.9 percent. That came just days after rival Pan American Energy sold US$25 million of similar notes that now yield minus 2.3 percent.
Another US$40 million of bonds sold by lemon exporter SA San Miguel at the end of June are on the verge of negative territory, yielding zero percent.
Of course negative-yielding bonds are found throughout developed markets these days, with the total outstanding topping US$15 trillion amid suppressed interest rates in Japan, Europe and the United States. But while it’s rarely seen in developing nations, the phenomenon isn’t entirely new for Argentina. In 2015, another period when controls limited the ability to send money abroad and analysts were ramping up forecasts for peso devaluation, the government sold dollar-linked bonds that also had a negative yield.
“Dollar linkers are popular whenever devaluation expectations increase,” said Eduardo Levy Yeyati, an economist and founder of Argentine consulting firm Elypsis. “You get an instrument that looks like a relatively good hedge with relatively low credit risk.”