COLUMN-Argentina 100-year bond a lesson in market nonsense and incentives: James Saft


Reuters

(The opinions expressed here are those of the author, a
columnist for Reuters)
    By James SaftJune 19 (Reuters) - Once in a while the universe reaches out
to explain very complex things in a very simple way.
    Such is the case with news that Argentina plans to sell a
100-year bond, a story tailor-made to illustrate exactly how
extreme financial market risk-taking has become.
    It also shows that global investors either a) have the
attention span of a gnat or b) are not paid for making good
long-term decisions. I'll vote for the latter, but am willing to
listen to arguments for the former. This isn't, at base, a story
about Argentina, but about how financial intermediaries are
paid.
    Argentina, which just two years ago emerged from a long and
tortuous period of default, a state to which it has laid claim
for more than half of all days since 1980, is seeking to borrow
$2.75 billion for 100 years at about 7.9 percent.
    This is the same Argentina which fought tooth and nail
against creditors unwilling to come to terms over its 2001
default, imposing currency controls.
    To be sure Argentina has a good "story" as they say in
roadshows, emerging from recession and seeing its credit ratings
on the rise, though we are still talking about a credit rated
"B".
    MSCI is also, according to the Financial Times, about to
lift Argentina's equities into Emerging Markets indices from
Frontier ones. That must make it a good bet to borrow money some
of which won't, under the best of circumstances, be repaid until
after many grandchildren of the readers of this story are no
longer clipping coupons.
    Since gaining independence in 1816, Argentina has defaulted
at least eight times, with some debate over whether some local
currency efforts should raise the tally. Sounds like a solid bet
to go the distance.
    And remember too that this particular borrower isn't just
acting in its own drama, but pushing this plot point at a time
when global interest rates are not too far off all-time lows.
    That's important, and I am a bit abashed to feel the need to
explain this, because the longer dated a debt instrument is the
more sensitive its value is to movements in interest rates. I,
like most investors, don't think the Federal Reserve will be
able to restore historically normal interest rates any time
soon, but interest rates don't have to rise too very much to do
serious damage to the capital value of a 2017 vintage 100-year
bond.

    BUMPY RIDE
    Any investor who is signing on for a 100-year bond, even the
geniuses who intend to trade in and out at opportune moments,
need to prepare themselves for potentially a very bumpy ride.
    To understand why Argentina is able to finance itself for
100 years, we are going to have to look at the issue more
broadly than just through the lens of Argentina's particular set
of merits and demerits.
    And sure, there are entities out there with very long-term
liabilities and long-dated debt can be useful for them, making
them "natural buyers".
    The real story behind Argentina borrowing for 100 years is
the very calm, very low-growth and low-inflation global
macroeconomic background, combined with a general mood of
optimism and a peculiar strain of financial markets calm. It is
not a surprise that this bond comes at a time of very, very low
volatility, and very, very low interest rates.
    Also I suppose we should add in the perverse incentives of
fund managers, who as the agents for their principals are paid
to take a narrow view of outperformance and stretch to achieve
it. Sober, sensible bond fund managers, the ones who don't
invest as if central bank liquidity will be endless, have had a
tough few years. Their peers more willing to take risks have
been right, and may well continue to be right, at least as the
game they are playing judges rightness.
    Capital markets do not discipline borrowers when they are
dominated, as they are, by agents acting for principals. For the
International Monetary Fund or any other person or body to speak
as if they do or will is absurd. All that counts is how the
credit looks in the time frame against which the performance of
the fund manager is judged.
    So, the markets are on a momentum high and risk taking, at
its far reaches, is extreme.
    Remember, this is the same market that brought you 800-some
crypto-currencies with a value of more than $100 billion. By
comparison, 100-year Argentina bonds are stolid, sensible
investments appropriate to widows and very young orphans.
    I wish them, and the agents acting on their behalf, and
Argentina, the very best of luck.

 (Editing by James Dalgleish)

(((At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)))

Keywords: MARKETS SAFT/ (COLUMN)



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