The Madness of Argentina’s Bond IssuePaul-Martin Foss
If you weren’t convinced that bond markets were in a bubble, Argentina’s recent sale of 100-year bonds should convince you. The fact that a country that has just re-entered world capital markets can sell 100-year bonds is absurd. Argentina only recently came to an agreement with holdout creditors from its last bond default, and it had to be dragged kicking and screaming through the court system in order to make that happen. With its last default taking place in 2014, how was Argentina able to sell such long-dated bonds?
Argentina’s Poor Credit History
In the early 20th century Argentina was one of the richest countries in the world, richer than France, Germany, and Italy, and the country was the envy of South America. Unfortunately, successive decades of populist economic policies have devastated the country and turned it into a nation in which anyone with any money at all has to fear robbery or kidnapping.
The likelihood that Argentina will return to its former glory in another 100 years is slim, so why are investors lining up to purchase government bonds that won’t be repaid for a century? Argentina has defaulted on its debt three times in the past 23 years, and seven times over the past 200 years. While the Macri government certainly seems to want to return to solid economic growth, Argentina’s ability and willingness to pay is likely dependent on how long he is able to stay in power.
Investors Seeking Return
The era of central bank-induced low interest rates that has pervaded markets for the past decade has made it incredibly difficult to find investments that offer a decent return. Investors have even gone so far as to purchase German and Japanese government bonds at negative interest rates. That means that they’re actually paying the government for the privilege of loaning them money.
Argentina’s 100-year bond, in contrast, offers a 7.9% interest rate. That’s awfully tempting in a market that hasn’t seen such “guaranteed” returns in years. Undoubtedly there are many investors who are hoping to hold these bonds only for a short period of time and collect a year or two’s worth of interest before flipping the bonds to someone else.
While the current Argentine government seems to be more fiscally responsible than its predecessors, no one knows how long this present state of affairs will last. President Macri’s predecessor, Cristina Fernandez de Kirchner, has launched a new political movement countering Macri, probably hoping to benefit from a mass movement similar to those that propelled politicians such as Donald Trump and Emmanuel Macron. Whether she will be successful, however, remains to be seen.
It’s unfortunate that the Argentine people will ultimately suffer the negative effects of their government’s policies. But what’s happening in Argentina has two important lessons for Americans.
First, don’t take what you have for granted. We in the United States have personal and economic freedoms that are still the envy of much of the world, but we often take them for granted. Just as Argentina slowly fell from its perch due to wrong-headed economic policies, so could the United States. No country is immune from it, and those who don’t protect their savings will be hit especially hard.
Second, the Argentine bond issue shows that bond markets are severely out of whack. When a country that serially defaults is able to sell billions of dollars worth of century-long debt at single digit interest rates, it’s time to get out of the market. This is a sign that risk is not being adequately priced in, which means the market is nearing or at a top. The only way from here is down, and that won’t be fun for bondholders.
This bond sale means that it’s time to dump bonds and invest in something safer, like gold. Do you know what gold’s average annual rate of return has been since President Nixon closed the gold window 46 years ago? 7.6%. That’s just slightly lower than the Argentine 100-year bond is offering right now. Of course, 50 and 100 years from now that gold will still be around and performing for whoever owns it. The Argentine bond will have long-since defaulted.
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