A key measure of Argentina’s sovereign risk fell to its lowest level in seven years as policy changes by President Javier Milei’s administration left the nation closer to a return to international debt markets.
The extra yield investors demand to hold Argentina’s sovereign debt over US Treasuries with similar maturity fell below 559 basis points on Friday, according to a JPMorgan index. The spread, which is now at the lowest since July 2018, has almost halved since Argentina’s midterm elections in late October when Milei’s party won by more than expected and more than doubled its seats in Congress.
The resounding victory, which came after a turbulent two months that saw the US Treasury step in to help stabilise local markets, fuelled optimism for the second half of Milei’s term. Investors are betting that the increased support will help the libertarian leader to push through a new wave of deregulation, overhaul labour and tax laws and cut spending, bringing to an end decades of currency crises and debt defaults.
A fresh set of policy changes is adding to the optimism. The government announced on December 15 it was loosening currency-trading restrictions and planning to buy as much as US$17 billion in reserves throughout 2026. The moves tackled some of investors’ main concerns about Argentina, which was perceived to be making slow progress to rebuild its thin foreign-reserve stockpile.
“This should help compress spreads and meaningfully increase the probability of a return to international debt markets in 2026,” said Thierry Larose, a portfolio manager at Vontobel. “By allowing a mild real depreciation and linking FX purchases to money demand, the BCRA reduces the risk of peso overvaluation.”
Even as spreads narrow, the Argentine peso has strengthened a bit to 1,478 per US dollar on Monday from 1,491 before the midterms. The currency has even gained value as the US Treasury stopped intervening in the local market.
The drop in spreads has also triggered a wave of corporate and provincial bond sales as Argentine issuers rush to capitalise on strong demand. Major companies began pricing bonds just days after Milei’s election victory, followed by the province of Santa Fe and Buenos Aires City and a sovereign issuance in local law in December.
But while spreads had fallen dramatically after the election, they hovered mostly above 600 basis points for the past three weeks. That led investors to argue that new catalysts were needed to bring country risk down further – closer to the 500-basis-point level Argentine officials view as the zone for an international bond sale. Analysts noted that spreads could fall further if the government strengthened its political footing, secured approval for key reforms in Congress and moved toward a more flexible FX regime.
Anticipation is now building that Milei’s administration will follow suit with a foreign-law dollar bond – a first since the 2020 restructuring. The government, which recently issued local-law dollar debt in what was seen as a dry run for the resumption of overseas borrowing, has about US$4.5 billion in payments on outstanding bonds due in January, and a similar amount for July.
Still, Economy Minister Luis Caputo recently signalled the government isn’t aiming to sell bonds abroad in January, and officials took a key step last week toward a repurchase agreement, or repo, with international banks that would finance the January debt payments.
“The decline in country risk is key – it could allow Argentina to regain access to international markets and roll over upcoming debt maturities,” said Fernando Marengo, chief economist at US advisory firm BlackTORO.
Investors will remain wary though. Argentina successfully kept country risk under 600 basis-point under former president Mauricio Macri’s market-friendly government, with the gauge reaching a low near 350 basis points in 2017. Macri’s reform push, however, ended abruptly as support for his government evaporated, undermining his austerity pledges and ultimately forcing him to seek a record bailout from the International Monetary Fund.
The acute market turmoil seen in the months leading up to the critical midterm vote also served as a stark reminder of how swiftly sentiment toward Argentina can turn. The peso, several investors say, is still overvalued, and Milei’s fight against inflation – which drove his popularity in the first half of his presidency – may become tougher with looser currency controls.
“The window is not a large one,” said David Austerweil, deputy portfolio manager at Van Eck Global. “This is the best possible moment for them to flexibilise the exchange rate.”
by David Feliba, Bloomberg
