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Emerging markets-Argentina debt leads as dollar windfall seen

Source: Reuters
By: Walker Simon

Argentina's bonds rose for a third straight day Monday as the end of a crippling farmers' protest opened the door to an anticipated multibillion dollar influx from exports of hoarded grain.

Argentine President Cristina Fernandez on Friday repealed an export tax hike on soybeans, the day after her vice-president sided with the protesters and cast the deciding Senate vote to to scrap the tax increase.

"With the the revoking of the tax hike in export grains, people are becoming more confident about the economic growth outlook in Argentina as grain production and exports re-normalize," said Nick Chamie, head of emerging market research at RBC in Toronto.

"That will reduce the risk premium on Argentine debt," he said.

Higher risk usually weakens bond prices.

On Monday, Argentina's portion of the JP Morgan's Emerging Bond index Plus (Embi+) rose 1.09 percent. Yield spreads over comparable U.S. Treasuries fell by 6 basis points to 593 bps.

Overall emerging market yield spreads over U.S. Treasuries narrowed by 4 basis points to 280 basis points, and total with total returns rose 0.1 percent 11EMJ.JPMEMBIPLUS.

On Monday, Argentina's benchmark Par dollar-denominated bond due in 2038 rose 0.813 point in price to bid 34.438, with a 10.031 percent yield. It has risen more than 7 percent in price after sinking to a two-year low on Wednesday.

The presidential repeal closed a chapter on four months of farmers' unrest, which sparked roadblocks and domestic food shortages. It also drove farmers to hold back grain exports in protest over export taxes of as high as 49 percent or more on soy, the country's biggest single export.


Some Wall Street analysts expect a sudden influx of at least $3 billion from exports of grain, which farmers had largely held back from market since March.

"Given current prices and the estimate of crop hoarding that backlog of U.S. dollar sales is likely about $3.5 billion," JPMorgan wrote Monday. "(Argentine) economic activity, the trade surplus, tax revenues and U.S. dollar inflows are all bound to improve."

An influx of dollars would allow the central bank to rebuild about $2.7 billion in foreign reserves it spent to shore up the country's peso during the political crisis.

On Monday, credit markets showed relief by cutting the cost of insuring Argentine debt by 2.4 percent, according to Markit data on the credit default swaps.

During the farmers' protest, the annual cost of insuring $10 million in Argentine debt over a five-year period rose to $750,000. according to GFI data on the benchmark five-year CDS contract .

The annual insurance has been subsiding since Wednesday and on Monday stood at $640,000 -- still above the $562,000 it cost before the Argentine government decreed the soy tax hike.

Argentina defaulted on $100 billion in debt between 2002 and 2005, and its CDS costs are some of the highest among major emerging market government borrowers.

(Additional reporting by Hilary Burke in Buenos Aires; Editing by Tom Hals)

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