Argentina's debt insurance costs and bond yields soared on Thursday after a U.S. appeals court hearing intensified fears that the country is heading for its second default in little over a decade.
Argentina's lawyers faced tough questions during Wednesday's hearing, the latest in a long-running battle between the country and "holdout" investors who rejected two exchanges of defaulted bonds to seek full repayment in the courts.
Judge Reena Raggi said the role of the 2nd U.S. Circuit Court of Appeals was to enforce contracts and "not to rewrite them." Such comments fuelled expectations for a ruling favouring the holdouts.
"The consensus from all the analyses of yesterday's hearing is that the ruling will go against Argentina and exchange bond-holders and that is the main takeaway … that this is headed for technical default," said Kevin Daly, a portfolio manager at Aberdeen Asset Management in London.
It is not clear when the U.S. appeals court will give its verdict on whether to uphold an order for Argentina to pay some $1.3-billion (U.S.) to the holdouts at the same time it repays creditors who took a steep haircut on their bonds in the two debt swaps.
That has raised fears of a default on the $24-billion worth of restructured bonds because Argentina's fiery left-leaning president, Cristina Fernandez, has repeatedly refused to pay the holdouts, whom she calls "vulture funds."
A lawyer for Argentina stood by the government position that the holdouts should not be paid, and indicated that the country could ignore a court order requiring payment.
The holdouts, led by Elliott Management affiliate NML Capital Ltd. and Aurelius Capital Management, say they are simply attempting to hold Argentina to its obligations and that the government can easily afford to pay them.
Investors fear that default could come as early as March 31, when Argentina is due to make a $180-million coupon payment on a Par bond, if the U.S. court rules against it before that date. Argentina has said it will take the case to the U.S. Supreme Court if the appeals court verdict goes against it.
"The strong statement from Argentina's lawyer and the nature of the judges' interrogation give a more negative twist in that it again plays towards the plaintiffs and raises fear of default," said Stuart Culverhouse, head of research at Exotix, a brokerage in London.
Reflecting such concerns, Argentine one-year credit default swaps (CDS) jumped more than 800 basis points to 6,040 basis points, according to data provider Markit.
That indicates an annual cost of over $6-million to insure $10-million worth of exposure to Argentine debt, more than double the levels for one-year CDS at the start of the year.
Five-year CDS rose more than 300 basis points to 2,538 when a December technical default, later avoided, looked inevitable.
The country's bond yield spreads on the EMBI Global dollar bond index surged 98 basis points. That means investors are demanding 12.12 percentage points above U.S. Treasuries to hold Argentine risk, not far off the 3-year highs hit last October.
Argentina's Global 2017 bond, which was issued as part of an earlier swap, fell 4 cents to trade at about 75.6 cents on the dollar, the lowest since end-November when technical default looked inevitable, though it was later avoided.
The yield rose 1.5 percentage points.
In early over-the-counter deals in Buenos Aires, bond prices sank by as much as 8 per cent, led by the Discount bonds .
Mr. Culverhouse, the head of research at London's Exotix, said he was advising clients to buy so-called untendered bonds, those not offered into the two past rounds of Argentine debt restructuring. Including the holdings of NML and Aurelius, there are an estimated $6-billion of these outstanding.
Market players say this debt has doubled in price since October 2012 to trade at more than 40 cents on the dollar.
"If the plaintiffs win, these bonds offer significant upside," Mr. Culverhouse said.