How We Know Risk Will Return With Vengence

From Bloomberg:

Link to story

Buenos Aires Readies Bond Sale as Borrowing Costs Tumble Versus Government

Buenos Aires’s borrowing costs are falling to a two-month low relative to Argentina, prompting the country’s biggest province to move forward with plans to sell its first international bond since 2007.

The province’s 9.375 percent bonds due in 2018 yield 280 basis points, or 2.80 percentage points, more than Argentine bonds, near the 274 basis point gap yesterday which was the smallest since May 20, according to data compiled by Bloomberg and JPMorgan Chase & Co.

Buenos Aires Economy Minister Alejandro Arlia may meet with investors abroad this month as the government aims to sell $500 million worth of bonds as early as September, a spokeswoman for the province, Felisa Stangatti, said yesterday in a telephone interview from La Plata.

The market is extremely willing today to buy anything that has a high yield and, if priced properly, a Buenos Aires bond would be placed no problem, provided a benchmark-sized bond is issued,” said Gorky Urquieta,

Economy Minister Amado Boudou said in June the federal government aimed to sell as much as $1 billion of bonds due in 2017 on international markets once yields fall below 10 percent. Yields crossed that threshold earlier this week.

Borrowing costs for Argentine issuers are tumbling after President Cristina Fernandez de Kirchner restructured $12.9 billion of defaulted debt in June, leading to a credit-rating upgrade. A 9.3 percent surge in the Standard & Poor’s 500 Index since July 2 has also stoked demand for higher-yielding, emerging-market assets, Urquieta said.


How do we know risk has returned?

Consider the track record of Argentina.

The country defaults in 1890, causing panic in England, their biggest creditor at that time.

1932 another major default.

1976 external debt default.

1982/1983 - near default.

1995 - another near default.

February 2002 - largest default to date - $95 billion in bonds. Bond holders take 60 to 70% haircut.

2003 - Argentina defaults again on $3 billion of IMF debt.

2010 - $12 billion in debt is restructured.

The country has defaulted multiple times in the last 30 years. What a track record!

So the serial defaulter is back to the bond market peddling its "this time its different" high yield bonds.

As the article states, a large portion of defaulted debt was just restructured in June. Yet investors, desperate for yield in a near zero interest rate environment, will consider its bonds.

We have a saying where I work - "the best indicator of future behavior is ..... past behavior".

Risk is back.

Bond investor beware.