Andrea Ferrell Business

Argentina’s Century Bond: A Cool or Catastrophic Investment?

Before facing an impending recession this year, Argentina had issued century bonds maturing 2117. But it seems the bill may be due sooner rather than later

By: Andrea Ferrell

Before facing an impending recession this year, Argentina had issued century bonds maturing 2117. But it seems the bill may be due sooner rather than later

A Brief Overview of the Argentine Economy

Argentina is one of the largest economies in South America, but with such great size comes great volatility. The main industry drivers of the Argentine economy are food processing/ agriculture and motor vehicles. Since independence in the 1860s, Argentina has defaulted eight times on government debt, with the most notable occasion in 2001 when the country was unable to repay $132B in dollar-denominated debt. In 2015, a market friendly president, Mauricio Macri, was elected to office. He promised to “fix” fluctuations of the Argentine peso and eliminate a variety of taxes on income and exports. 2017 brought an emerging market boom where risk-hungry investors flocked to high yield emerging market assets such as bonds and flowed fresh money into the Argentinian economy. As a result, Argentina’s inflation had dropped from 40% to 24% by the end of 2017, as the country curbed their economic woes.

In 2018 the U.S. began to raise interest rates, causing investors to panic as dollar-denominated debt, which includes a majority of Argentine debt, became more expensive for Argentina to pay back. While other parts of the world, like Europe and Japan, have not begun to raise interest rates, investors are looking to the future when deciding whether or not to buy a century bond. This “run” on emerging markets is evident in the Peso/USD spot rate, as the Argentine Peso has lost almost 50% of its value since the beginning of 2018. Likewise, to combat rising inflation, Argentina has raised interest rates to 60%, more than doubling borrowing rates from the beginning of the year. Analysts have predicted that by the end of 2018 Argentina will enter into a recession as their GDP is forecasted to be -1.9%.

The Emerging Market Boom of 2017

During the Emerging Market boom of 2017, Argentina released a century bond, maturing in 2117. In the fixed income market, century bonds are an anomaly, with few countries and corporations issuing them. Countries release century bonds as a way to let investors place long-term bets on the issuer, and some institutional investors buy century bonds as a long-term diversification asset in their portfolio. In 2017, Argentina issued $2.75B in bonds, with a coupon of 7.125% and a yield of 7.9%. Bond yields show investors their current rate of return and fluctuate as the bond matures. The Argentine century bond reached above 10% in August of 2017 as investors began to lose faith in emerging markets and a sell-off ensued. Bond yields rise as prices fall because the demand for the bond drops and investors look for lower prices/higher yields. With the recent release of the IMF’s Economic Outlook and their credit line extension of $70B from $50B, the yield dropped below 9% as investors had a positive outlook on the future of Argentina’s economy.

What’s the Deal With Century Bonds Issued in Other Countries:

Argentina is not the only country to issue century bonds. In 2010, Mexico released $1B in century bonds. The low interest rate environment of 2010 attracted investors, and the bond’s yield was 6.1%. On October 22, 2018 the yield was 6.03%, showing little change since its issuance. Mexico’s century bond reached high of 6.7% in 2011, and a low of 4.5% in 2012. Comparing the three percent spread between the yields of these two century bonds, one can see the risk that comes with investing in an economy as volatile as Argentina’s. While Mexico has a variety of risks associated with its economy such as large drug cartels and political corruption, it continues to benefit from trade agreements like the updated NAFTA deal and the booming U.S. economy. Likewise, in September 2017 Austria became the first developed eurozone economy to issue €3.5B in century bonds, expiring in 2117. The bond was issued with a yield of 2.1% and as of October 30, 2018 the yield has dropped to 1.79% as investors move into safer assets. Analyzing the yields of these three sovereign century bonds, one can see how the differences in the stability of each economy affects the yield of each respective bond. An emerging market with a past of defaults, like Argentina, has a much higher yield than a stable, developed country, like Austria.

Investing in the Future

Looking to the future in the year 2117, when Argentina’s century bond matures, is tough because there is no guarantee where Argentina’s, as well as the world’s, economy will be. However, if looking at Argentina’s default ridden past, one can only speculate when Argentina will default on its debt payments again. In its current economic state, Argentina is not a safe bet for investors as the country continues to battle high inflation with extremely high borrowing rates. Likewise the rising interest rates in the U.S. make debt in countries like Argentina more expensive and less attractive for investors. The short-term outlook for the global economy makes Argentina’s century bond unappealing; however, the world in 2117 is full of unknowns, making the century bond a gamble that risk-hungry investors are willing to take, even if they do not live to see the bond mature 99 years from now.

Works Cited

Allen, K. (2017, September 12). Austria joins century bond club, raises €3.5bn at 2.112% yield. Retrieved from https://www.ft.com/content/1a0862fe-5647-3563-b8be-d1fc10b13524

Cohen, L. (2018, August 28). Argentina’s economic crisis explained in five charts. Retrieved from https://www.reuters.com/article/us-argentina-economy/argentinas-economic-crisis-explained-in-five-charts-idUSKCN1LD1S7

Devin, F. (2018, January 19). Government Says Argentina’s Economy Grew 2.9% in 2017. Retrieved from https://www.thebubble.com/government-says-argentinas-economy-grew-2-9-in-2017/

Gillespie, P. (2018, September 4). Argentina to Go Deeper Into Recession, Central Bank Survey Says. Retrieved from https://www.bloomberg.com/news/articles/2018-09-04/argentina-to-go-deeper-into-recession-central-bank-survey-says

Mander, B. (2017, June 20). How did Argentina pull off a 100-year bond sale? Retrieved from https://www.ft.com/content/5ac33abc-551b-11e7-9fed-c19e2700005f

Millan, C., & Gonzalez, P. R. (2018, September 21). Argentina 100-Year Bond Rally Advances on IMF Optimism. Retrieved October 23, 2018, from https://www.bloomberg.com/markets/fixed-income

Phung, A. (2018, July 02). Why Do Companies Issue 100-Year Bonds? Retrieved from https://www.investopedia.com/ask/answers/06/100yearbond.asp

Serial defaulter Argentina manages to sell 100-year bonds. (2017, June 20). Retrieved from https://www.cnbc.com/2017/06/20/argentina-sees-strong-demand-for-surprise-100-year-bond.html

Vyas, K. (2010, October 05). Mexico Sells $1 Billion Century Bond. Retrieved from https://www.wsj.com/articles/SB10001424052748703298504575534621044294114

Wernau, J., & Dube, R. (2018, September 04). How Argentina’s Evolving Economic Crisis Unfolded. Retrieved from https://www.wsj.com/articles/how-argentinas-evolving-economic-crisis-unfolded-1536062407

 

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