Sinking Liquidity for Argentine Debt Adds to EM Investor Woes

Selcuk Gokoluk

(Bloomberg) -- Trading Argentine bonds has become a test of endurance as the prospect of a possible default triggers wild price swings and volume dries up.

The Liquidity Assessment Scale of 1 to 100 (100 being the most liquid) slumped to 12 on Wednesday for the South American nation’s bonds from 68 just three weeks ago.

“There is a lot of hysteria in the market and it is causing a lot of uncertainty on valuations,” said Jason Devito, a Pittsburg-based money manager at Federated Investment Mgmt Co., which has $502 billion under management.

The peso is hovering near record lows, extending this year’s worst decline in emerging markets, after opposition candidate Alberto Fernandez won a landslide victory in the Aug. 11 primary, making him clear favorite for the Oct. 27 presidential election. Investors fear he will seek to renegotiate debt obligations with the International Monetary Fund and bondholders.

Read: Argentine Peso Market Dysfunctional After Primary Results

The liquidity crunch prompted selling in other high-risk debt, triggering $1.1 billion outflows from emerging-market debt funds in the week ending Aug. 14, according to Bank of America Merrill Lynch citing EPFR Global data.

“The election result was a wake-up call for investors holding risky credit,” said Alejandro Arevalo, London-based head of emerging-market debt strategy at Jupiter Asset Management, which has $51 billion under management. “We saw some cutting of positions in lowly-rated credits like Ukraine because of liquidity constraints in Argentine debt.”

The average LQA score for emerging-market government bonds included in Bloomberg Barclays index has fallen to 81 for from 84 at the end of July, approaching the edge of the highly-liquid category.

“This could not have come at a worse time,” said Paul Greer, a London-based money manager at Fidelity International. “August is the worst time for liquidity in the market and this makes Argentina’s turbulence more dangerous with many people at risk of getting trapped in these bonds.”

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