Argentine bonds beat all emerging market debt this month as rising exports pushed international reserves to a record and a credit rating increase bolstered confidence in South America’s second-biggest economy. Argentine dollar bonds returned 8.5 percent on average this month, according to JPMorgan Chase & Co.’s EMBI+ indexes. Venezuelan debt posted the next-best performance, returning 4.4 percent, while Ukrainian bonds lost 0.4 percent. The combination of the highest emerging-market yields after Venezuela and Ecuador and the fastest economic growth in almost two decades is luring investors to Argentine debt. Exports rose 47 percent in August to $6.4 billion after a record 55-million metric ton soybean harvest, helping push central bank reserves to $51.3 billion. The central bank forecasts the economy may grow as much as 9.5 percent this year, the most since 1992. “When you look at capacity and willingness to pay, there is no doubt that investors have to look at Argentina,” said Paolo Valle, who co-manages more than $1 billion of emerging- market assets including Argentine bonds with Federated Investors in Pittsburg. “There’s higher headline risk and higher volatility, but you’re getting paid to own it.” President Cristina Fernandez de Kirchner tapped $5 billion of reserves to pay debt this year and is seeking another $7.5 billion for 2011, according to her Sept. 16 budget proposal. Standard & Poor’s raised the country’s credit rating one level to “B,” five levels below investment grade, on Sept. 13, citing the economy’s “strong” performance. The move followed Argentina’s $12.2 billion restructuring of defaulted bonds in June, the second since a 2001 financial crisis. ‘More Flexibility’ Argentina’s debt-to-gross domestic product ratio fell to 48 percent as of June 30 from as high as 166 percent in 2002, Finance Secretary Hernan Lorenzino told lawmakers in Buenos Aires yesterday. As much as 45 percent of the country’s debt is held by government agencies, with only a third of maturities coming due in the next three years held by private creditors, S&P said in its ratings report. “That gives them much more flexibility to pay,” Valle said in a telephone interview yesterday. Federated has an “overweight” position in Argentine debt and didn’t add to its holdings in September, he said. Argentina is benefiting from a “hunt for yields,” said Jeremy Brewin, who manages $2.3 billion of emerging-markets assets including Argentine debt. Argentine dollar bonds yield 680 basis points, or 6.8 percentage points, more than similar- maturity U.S. Treasuries, the highest after Ecuador, at 1036 basis points, and Venezuela, at 1139, among nations tracked by JPMorgan Chase & Co.’s EMBI+ Index. Argentina is outperforming because there has been “less stress than had been anticipated at the beginning of the year,” Brewin said. Falling Yields The yield on Argentina’s 7 percent dollar bonds due in 2015 tumbled 129 basis points this month to 9.91 percent at 9:23 a.m. The yield on Ukraine’s 6.58 percent dollar bonds due in 2016 rose 23 basis points to 6.99 percent over the same period, while the yield on Venezuela’s 2027 notes fell 38 basis points to 13.29 percent. The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries fell 83 basis points this month to 677 today, according to JPMorgan. Argentina’s yield spread is about 150 points higher than Ukraine and almost 500 points above neighboring Brazil. The peso fell for a ninth-straight month, dropping 0.2 percent in September to 3.9604 per dollar. The currency closed at 3.9725 per dollar on Sept. 28, its weakest level since its inception in 1992. Warrants linked to growth in South America’s second-biggest economy fell 0.01 cent today to 11.85 cents, according to data compiled by Bloomberg. Tapping Markets Five-year credit-default swaps tied to Argentine debt fell 12 basis points yesterday to 738. The swaps dropped 210 points during September, the biggest decline among government debt worldwide. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. “The use of reserves to pay debt along with the debt restructuring has substantially cut the bond yields, leading private and public actors who weren’t able to tap credit markets to access them,” Lorenzino said during congressional testimony yesterday. Argentina’s bond rally may have peaked as recent gains prompt investors to look to other emerging economies, said Igor Arsenin, head of Latin America strategy with Credit Suisse Group AG in New York. ‘More Confident’ “Now that everyone is more confident that emerging market assets will perform well moving forward people will look at some of the underperformers,” Arsenin said. The provinces of Buenos Aires and Cordoba have taken advantage of falling borrowing costs to sell bonds abroad. Buenos Aires sold $550 million of five-year notes this week to yield 12 percent, according to data compiled by Bloomberg. Its budget calls for a total of $1.1 billion in international bond sales this year. Cordoba sold $400 million of seven-year dollar bonds last month to yield 12.375 percent. Grupo Supervielle SA, which owns Argentina’s Banco Supervielle SA and Banco Regional de Cuyo SA, is preparing the sale of 200 million pesos in local bonds, the banks’ President Juan Carlos Nougues said in an interview on Sept. 28. Shareholders of Aeropuertos Argentinas 2000 SA, the country’s main airport operator, approved plans this month to sell as much as $300 million in bonds. Federated’s Valle and Aviva’s Brewin said they expect Argentine debt to outperform through the end of this year. “The best performance on most of the emerging market debt happens as a result of step by step improvements,” Brewin said. “And that’s basically what’s been happening in Argentina.” To contact the reporters on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net; Ben Bain in New York at bbain2@bloomberg.net. To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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