The world’s best-paying bond has a big fan in one of the world’s largest bond investors. Pacific Investment Management Co and its parent company, Allianz Global Investors, have snapped up an Argentine government note that pays a floating coupon equal to the country’s benchmark interest rate — which at one point in October reached a staggering 74 percent. They boosted holdings by more than 50 percent in 2018 and now own about a quarter of the 104 billion pesos ($2.7 billion) outstanding, according to data compiled by Bloomberg.
While the nominal returns in 2018 have been huge — the quarterly payout this month was at an annualised rate of 65 percent — holders measuring their investment in dollars have seen wild fluctuations. The peso plummeted 50 percent from the end of April through September, but has rebounded more than 7 percent since then, meaning the currency has gone from the world’s worst performer to one of the best.
When Argentina issued the bond in June 2017, it was unlikely anyone in the government envisioned how costly it would be. The benchmark rate at the time was a more modest 26 percent and the nation was a darling of investors betting big on President Mauricio Macri’s pledges to revive an economy strangled by his socialist predecessor.
But that changed in 2018 as slowing growth, stubborn inflation and a growing budget deficit sent the peso tumbling. In response, the government sought a record credit line from the International Monetary Fund and the central bank jacked up borrowing costs — first to 40 percent in May, then 60 percent in August and more than 70 percent in October before settling back near 60 percent now.
The economy entered a recession in 2018 and analysts don’t forecast a resumption in growth until the second half of 2019. Consumer prices are poised to increase about 47 percent in 2018, more than triple the central bank’s initial target of 15 percent.
Pimco hedged some of its currency exposure to the Argentine notes, according to a person with direct knowledge of the matter, who asked not to be identified because the information is private.