Argentina's country risk surpasses 500 points as global markets turn adverse

Argentina's country risk has climbed back above the 500 basis points threshold, marking its highest point since late May, as sovereign bonds continue to decline. This rise reflects not only domestic market pressures that intensified in August but also an adverse international scenario characterized by a significant increase in long-term interest rates across major markets.

On Monday, the country risk indicator closed at 510 basis points, an increase of 21 units from Friday's close, representing a 4.29% jump. This level is the highest since May 25, when it reached 514 points, and a notable increase from the 402 points recorded in mid-July, which were the lowest of Javier Milei's administration. The indicator has moved away from its recent lows.

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The sell-off [massive sale] in Argentine assets already has a little more than a month. When one looks at the country risk since the beginning of July, you have an increase of about 100 basis points, but the yields on bonds have risen a little more than 120 basis points: the difference is the rise in risk-free rates.

Analysts at Grit Capital point to the "ATM effect" as a factor amplifying the impact on Argentine debt. They note that Argentina possesses one of the most liquid dollar sovereign curves among emerging markets. Consequently, when global portfolio managers need to rapidly reduce risk, these Argentine securities become among the easiest assets to sell, functioning as a "cash machine" to generate liquidity. This phenomenon typically emerges when risk managers begin demanding position reductions, helping to explain the profit-taking observed in Argentine bonds.

Indeed, sovereign bonds saw declines of up to 2.9% in dollar terms on Tuesday, with the Global 2046 (GD46D) bond being a notable example. Fran Mattig, portfolio manager at One618, explained that the sell-off in Argentine assets has persisted for over a month. He highlighted that while country risk has risen by about 100 basis points since early July, bond yields have increased by just over 120 basis points. This difference is attributed to the rise in risk-free rates. The renewed tensions in the Middle East and the subsequent surge in oil prices have negatively impacted U.S. rates. Additionally, uncertainty surrounding the Federal Reserve's policy communication, with a 50% reduction in post-meeting statements, adds further volatility, pushing the 10-year U.S. Treasury yield above 4.70%.

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The new recrudescence in the Middle East situation and the consequent rise in the price of oil ended up impacting American rates negatively. At the same time, the uncertainty generated by the change in paradigm of Kevin Warsh, the president of the United States Federal Reserve (FED) who reduced post-monetary policy meeting statements by 50%, adds much more noise. And that's why you have the 10-year American rate above 4.70%.