Argentine bond savers on the alert

Investors are waiting for US Federal Reserve meeting on Wednesday and Thursday. Although they take for granted that rates will continue unchanged, they all the same want to know what the minutes of such meeting say.

Global markets will have a volatile week for several reasons, and Argentine bonds and stocks wont' be left outside. Investors are extremely cautious, in view of such contradictory signs.

Federal Reserve is expected to keep rates stable this week, at 5.25 per cent annual. Investors are really interested in Fed's press release. They will analyse every word, every phrase, comparing it with previous minutes, so as to find any sign about rates' fate.

Moreover, data on housing sale in US will be disclosed this week. During the last days, weakness of risk mortgage sector caused uncertainty in loan markets and in mutual funds, fearing that these problems might spread to mortgage market. Funds hit Wall Street directly.

After such meeting, Fed's favourite inflation indicator will be revealed: core spending index in personal consumption. If it shows modest pressure on prices, good mood may return, at least for a few days.

"The risk of failing to rein in inflation will probably be kept as the main concern, though Fed's language may be changed because underlying CPI, on an interannual basis, has slowed down to 2.2 per cent from February's 2.7 per cent," HSBC economists stated in a press release to its clients.

Hopes for rate cut this year have deflated. In December, financial markets took for granted a 75-point reduction, which would take rates to 4.50 per cent annual by the end of 2007. Now, everybody believes that the Fed will keep them stable.

Conclusions

In Basel, Switzerland, conclusions reached by the Bank for International Settlements (BIS) were not promising. The General Manager of the entity, Malcom Knight, stated that global central banks should raise interest rates further, because "access to credit remains easy."

In the press conference held after BIS General Annual Meeting, Knight said that "normalization of interest rates should continue across the world."

Central bankers of G-10 and of other industrialized and emerging countries gathered to talk about global economy. BIS is made up of 55 central banks, which observe the rules imposed by the entity.

"The global economy is poised for a fifth straight year of growth above 4 percent, but risks remain and have as their common thread the highly accommodative financial conditions that have buoyed it in recent years," Knight expressed.

Review

BIS warned that the effects of US housing market weakness might not have become obvious yet.

In order to understand what BIS is trying to say, we must go through main global benchmark interest rates:

US Federal Reserve has kept rates at 5.25 per cent annual since last June.

The European Central Bank (ECB) has raised rates six times till reaching current 4 per cent annual.

Japan Bank has barely restricted its monetary policy and has raised rates to 0.5 per cent annual, thanks to rally of Japanese economy as well as of banking sector.

Last week, Argentine bonds had to endure fear of global rate hike. Country risk climbed 5 points to 285 units, the highest level of the year. The worst enemy of investments in emerging bonds is US Treasury 10-year bond rate, which reached to 5.30 per cent ten days ago. Last Friday, it closed at 5.13 per cent, a high level yet.

None of the 16 countries making up JP Morgan portfolio managed to escape from risk rise. The most moderate increase was Mexico's, with 1 point to 85 units. Ecuador keeps on being the riskiest with 604 points and Egypt the most reliable with only 51 points.

Although JP Morgan index is estimated on the basis of dollar-denominated bonds, Argentine papers lost credibility when government intervened Argentine Statistics and Census Institute (INDEC, in its Spanish acronym) and started altering cost-of-living indexes.

This is not the best international context for Argentine bonds. Apart from cold snap, bad foreign news are getting government down.