Argentines protect themselves more from inflation than from devaluation

Investors have long relied on at least one thing in the wild and unpredictable Argentine markets: a big devaluation of the peso was looming and the best place to take refuge from this was bonds linked to the peso. dollar.

Now, after focusing on this business for two years in a row, they are throwing in the towel. They were so surprised that the devaluation did not happen immediately after the legislative elections in November (politically, the most logical time to do so) that they have begun to give credence to the Government’s promise that there is no such plan in the future. As a result, they are now rapidly reducing purchases of local dollar bonds and instead starting to pour money into inflation-linked bonds, a safe haven they see as better as consumer prices soar at an annual rate of more than of 50%.

“These IPC-linked funds will continue to be very attractive and in high demand,” says Néstor de Cesare, president of Allaria Fondos in Buenos Aires.

The common funds Argentina that invest in debt linked to inflation have had a return of 54% during the last year, almost double the profits that the debt linked to the dollar showed in the same period, according to data compiled by the consultancy 1816 Economy & Strategy. The outperformance is even more marked in the last three months: 13.1% for inflation debt, 5.6% for dollar bond funds.

Funds linked to consumer price increases absorbed inflows of 43.7 billion pesos ($421 million) in the last 40 days, more than 13 times the 3.3 billion pesos that went into dollar-linked mutual funds, according to 1816 Economy. & Strategy. In the three months before the election, the demand for dollar-linked mutual funds had been four times that of CPI-linked mutual funds.

Although the Administration of the President Alberto Fernandez has insisted on telling investors that it was not planning a sharp devaluation, those forecasts were met with a heavy dose of skepticism. Investors thought shedding an overvalued currency would be an obvious step to put the economy on a long-term growth path, even as it upset Argentine savers. Many also thought the International Monetary Fund would demand it as part of ongoing negotiations over rescheduling some $40 billion in loan payments.

But the expected devaluation after last year’s midterm elections did not materialize. And the government repeated that it was not in its plans at all, while the peso continued its slow but steady daily depreciation. In this way, investors gained confidence in the peso even as inflation began to accelerate.

Of course, it is possible that policymakers will decide at any moment that it is time for a major devaluation of the peso. The currency sells for 104 per dollar on the official market, but 209 per dollar on the parallel markets that Argentines use to circumvent controls that severely restrict dollar purchases. It will be more difficult for Argentina to preserve the strength of the peso in the official market as its foreign exchange reserves diminish. Net reserves, which exclude the bank’s foreign-currency liabilities, have fallen to just $1.8 billion, according to consultancy Anker Latin America.

Still, investors are betting that inflation-linked debt will offer higher returns. Yields have fallen into negative territory amid rising demand. In inflation-linked Treasuries due next year they are down to -1.8% from 6.35% in September.

The government has announced that utility rates will rise in the first quarter and monetary expansion has accelerated to an annual pace of 40% in December from 30% in October, putting further pressure on inflation.

Last week, the country posted its fastest monthly inflation rate in eight months, leaving annual inflation for 2021 at 50.9%. Runaway price increases are making it difficult for Argentina to come up with a credible plan to stabilize the economy amid talks with the IMF to reschedule payments on some $40 billion owed to the institution.