The Daily Update - Argentina, Mexico

Argentina gained independence some 200 years ago, and since then it has defaulted on its external debt seven times, and on its internal debt five times. So one might not be surprised if over the coming century there was one or two concerns with lending to the country, but of course there is ‘a price for everything’.

Yesterday, Argentina issued a 100-year bond, the Argentina 7.125% maturing 28th June 2117. The deal came as a private placement with USD 2.75bn issued at a price of $90.00 which is a spread of +514bps over the US long bond for the B3 expected rating from Moody’s. So this bond has a duration of a little over 20 years. According to our Relative Value Model (RVM) that is about 2.5 credit notches expensive and the ‘fair value’ (FV) spread is shown as about +800bps, which is a fall of 24 points in price to reach that FV spread. We all know ‘past performance is no guarantee of future performance’ but put simply, OUCH.

Mexico also has had a problematic past although it has been over thirty years since the last episode back in 1982 and their currency crisis and are currently rated A3 / BBB+ by Moody’s and S&P. They also have a long dated international bond outstanding, the Mexico 5.75% maturing 12th October 2110. Issued in 2010, this USD 2.677bn issue does trade and is semi-liquid with about five market makers. With a duration of 18-years this bond is priced around $105.00 which is a spread of +270bps over the US long bond. FV for this issue is at +140bps and so this bond is indeed over 3 credit notches cheap and would need to rally over 30 points in price to reach that FV spread.

Trade of the day, ‘Short Argentina/Long Mexico’; you won’t have to wait 100-years for this one to work.