It is true that things move quickly in Emerging Markets but the fact that Argentina pipped the US treasury to the post in issuing a 100 year bond this week is startling. A “century bond” was also issued by Mexico in 2010, and is extraordinary due to the recent recovery of this nation from years of turmoil, default and despair. The new government, led by Mauricio Macri, is hailed as being pragmatic and market friendly, and the yield on the debt (7.9% and around 150bps over regional yields) is attractive in today’s low return environment. The issue was 3.5 x oversubscribed, pointing to the groundswell of demand for higher yielding issues.
But there is a mountain of reform to overcome before such a long dated bet on the country can be assessed – the country has pledged to reduce its deficit, but the echoes of former defaults (8 times in its history) and litigation attached to such debacles (c.f. Elliott’s protracted litigation) are hard to overlook. However, if Argentina has indeed turned its back on populism, then this lends intriguing evidence to an assertion we recently heard from an emerging markets manager that his region is one of the more relatively stable ones from a political standpoint today – especially v. the US and Europe.
Pundits suggest that due to bond math, maturities over 30 years rarely matter in terms of valuations – as a USD denominated bond there is no currency risk and with yields of close to 8% the investor will be paid back in around 12 years and there is still resale and residual value in the bond. There is an recall of the taper tantrum in November 2013, which coincided with high-profile and “push the envelope” bond issues by frontier countries in Africa, such as Rwanda. So is this the top of a frothy market? Time will tell . . although Emerging Markets are far from their top . . unless expectations have outstripped current performance.