BlackRock: Argentina's 8.3% Bond Surge May Be Nearing an End

But BlackRock says the rally is running into old problems. Past defaults and an upcoming election could stall the gains.

The Rally and the Default History

BlackRock emerging markets portfolio manager Pablo Goldberg argues that the strong bond returns overlook Argentina's default track record. "If you look at the picture, Argentina's fundamentals would suggest a much better rating. "But when you watch the whole movie, the past still weighs on it"." That history makes investors demand a "political risk premium" - extra yield to compensate for the chance of another default.

The premium has fallen sharply, from 1,456 basis points before last year's congressional elections to 433 basis points now. A basis point is one-hundredth of a percentage point. Even after that drop, Argentine debt still costs a lot more than U.S. Treasuries.

Goldberg says the market will keep demanding that extra compensation until Argentina proves it can break its old habits.

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Election and Jobs Add Pressure

The next presidential election is in October next year. Incumbent Javier Milei, a libertarian, faces the opposition Peronists. Every election in Argentina feels like a coin flip, Goldberg says. "Every election in Argentina appears to be so binary. "Until the swings of the past are gone and there is a more sustainable path forward, the market will continue to trade with a bit of a premium to get paid for that volatility"."

Jobs are also becoming a major worry. Unemployment rose to 7.8% in the first quarter from 7.5% three months earlier. Growth has been solid, but it is concentrated in sectors that do not create many jobs. "What appears to be increasingly important is jobs, because those translate into votes," Goldberg says. "This is what everybody is going to be looking at."

Inflation has dropped from nearly 300% to about 33% annually. The peso has weakened less than 2% this year. But joblessness is moving in the wrong direction, and investors are watching closely.

Ratings Rise, But Borrowing Is Still Too Costly

In the last two months, both Fitch and S&P Global raised Argentina's credit rating to single-B. That is the first time since 2018 that the country has held that level. Even with the upgrade, Argentina's default history still penalizes its credit rating by three notches in some methodologies.

Finance Minister Luis Caputo has delayed Argentina's return to international debt markets. Borrowing costs remain too high, even though the country faces large bond repayments in the coming years. Goldberg says the clock is ticking. "There is a wall of maturities building over the next couple of years, and buying some insurance against this would help. "Maybe right now you do it at a higher yield than you would like, but just getting into the process is going to be important"."

BlackRock's own exposure is modest. It holds about 3.3% of Argentina's benchmark 2035 bonds and 4.6% of its 2030 notes across its ETFs and mutual funds.

What to Watch

Goldberg says the election is binary, and jobs are increasingly important because they translate into votes. The market will continue to trade with a premium until Argentina shows a more sustainable path forward.

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