Argentina bond investors increasingly fear the day after Milei

Concern is mounting once again in the bond market that Argentines are tiring of President Javier Milei and his radical economic reform agenda.

Just six months after Milei’s party won a surprising victory in midterm elections, worries over his future have been reignited by polls showing his approval rating at its lowest since he took office almost two-and-a-half years ago.

Approval of the libertarian president fell to 35.5 percent in April, while disapproval climbed to 63 percent, according to LatAm Pulse, a survey conducted by AtlasIntel for Bloomberg News. Those figures stood at 44 percent and 51.6 percent respectively at the start of the year.

Sovereign local-law dollar notes due in October 2028 – 12 months after Argentina’s next presidential election – now yield 8.3 percent, a whopping 360 basis points more than similar bonds due in October 2027. The cost of insuring against default in Argentina shows a similar pattern, jumping the further beyond the next election they go. For investors, the risk is a shift back to policies seen as less supportive of fiscal discipline, market access and private investment.

“Electoral risk is evident across the curve, and the 2028 bond in particular is being dragged by that,” said Alejo Costa, head of economics and strategy at Buenos Aires-based brokerage Max Capital.

That risk has a name in local markets – ‘Kuka,’ a mix of Kirchner, the surname of two former presidents, and the Spanish word for cockroach, ‘cucaracha.’ It refers to the interventionist and populist policies that shaped much of the past two decades, including tighter currency and capital controls, regulated prices, higher public spending and a more unpredictable policy framework. 

“I believe the Kuka risk is zero,” Economy Minister Luis Caputo told investors Tuesday. “There is no danger of returning to the past.”

But the market begs to differ.

The higher premium investors are demanding to remain exposed beyond Milei’s current term is also visible in inflation-linked peso bonds. In that segment, the curve has steepened sharply this month, with inflation-linked bonds maturing in June 2028 climbing over the past 30 days from 5.5 percent to 7.9 percent, while the bonds maturing in June 2027, yield a negative real rate of 1.2 percent.

“Polls that were somewhat worse for Milei started to come out on average, and the consensus began to shift in the direction that Milei’s approval is deteriorating,” Costa said.

The political and electoral factor isn’t the only driver behind this risk, given that sovereign debt payments pile up between 2027 and 2033 and electoral uncertainty mounts in the US, which is part of the current support for Argentina’s government and its bonds.

Public support for Milei has been weakening in the first months of the year as large sectors of the economy, such as manufacturing, retail and construction, fail to track the rebound in exports from the recession in 2023 and 2024.

“People have started to focus on the election because they are worried that the economy is not growing,” said Miguel Kiguel, director of local consulting firm Econviews and a former finance secretary. “Things may improve, but the key question is whether the pace of that improvement will be enough to change the public mood.”

Argentina’s month-on-month economic activity dropped 2.6 percent in February – the last period for which figures are available – its biggest decline in almost five years. Inflation also remains stubbornly high, with consumer prices rising 32.6 percent in March from the year-earlier period.

An index of voter confidence in the government compiled by Torcuato Di Tella University, meanwhile, fell for the fifth consecutive month in April, reaching 2.02 points on a scale of five. 

“We know that the last months were hard,” Milei said in a post on X at the beginning of April. “That’s why we’re asking for patience. This is the right path. Changing it would mean blowing up what’s been achieved.”

Credit default swaps indicate a five-percent risk of default over the next year, but that jumps to 22 percent for three years and to almost 60 percent for the next decade, according to figures calculated by Max Capital and Portfolio Personal Inversiones.

“All of this is being driven to a large extent by the secondary effects of the economic transition,” said Pedro Siaba Serrate, head of research and strategy at PPI. “We are seeing a very uneven economy, with a strong story in primary-product exports, which has a positive impact at the federal level, and at the same time very little activity in sectors concentrated in Greater Buenos Aires, which are more labour-intensive.”

by Ignacio Olivera Doll, Bloomberg