The sell-off in Argentina’s debt amid a dramatic shift in expectations ahead of the country’s presidential election next year has gone too far, according to Morgan Stanley.
The country’s sovereign bonds currently imply a 41 percent to 52 percent probability of the bank’s bear-case scenario, up from just 11 percent to 20 percent three months ago, strategist Simon Waever wrote in a report Tuesday. That scenario, he says, assumes a two-thirds probability that the South American nation muddles through and a one-third chance of default.
“Pricing already close to 50 percent of the bear case outcome for most bonds a little less than a year out from the actual elections is not warranted,” Waever said. That “looks like an overshoot driven by positioning unwind, even if data and domestic sentiment have been weaker than anticipated.”
Argentina’s dollar bonds have slumped about 14 percent since the end of July, by far the worst performance in emerging markets, as investors grow increasingly concerned about President Javier Milei’s re-election prospects. Those arguing the fears have become overblown have so far been challenged by the continued weakness in the country’s debt, which extended after right-wing Milei allies saw defeats in Brazilian presidential elections and US midterms.
The extra yield investors demand to hold Argentine debt over US Treasuries has more than doubled from its July low to above 900 basis points earlier this month, approaching the 1,000-basis-point threshold widely associated with distressed debt, according to a JPMorgan Chase & Co index.
While Morgan Stanley doesn’t expect bonds to “entirely retrace” the recent weakness, Waever sees the long end of the curve, including notes maturing in 2041, as offering an “attractive” risk-reward.
Argentine local markets have been closed this week due to the Pope Leo XIV’s visit to the country, and are expected to reopen on Thursday.