April 3, 2013 / 2:37 PM / 4 years ago

Argentine debt insurance costs; bond yields drop

LONDON, April 3 (Reuters) - Argentine credit default swaps and bond yields fell sharply on Wednesday on signs that a technical default had been averted at least until its next bond coupon payment, due in June.

Sources told Reuters Buenos Aires had made scheduled payments on its 2038 par bond and 2015 Boden bond.

"If you see the price action today on discounts and the global 2017s, it seems that payment has been made," said Jean-Dominique Butikofer, head of emerging markets fixed income at UBP in Zurich.

The Argentine government has not officially confirmed whether the coupon payment was made.

Markets were also supported by a New York court's demand that hedge fund creditors consider Argentina's payment proposal.

Hedge funds suing Argentina for $1.3 billion in payments on defaulted bonds were given three weeks by the court on Tuesday to respond to a payment offer made by Buenos Aires.

While the funds are unlikely to accept the proposal, which would pay them a sixth of what they demand, the three-week deadline delays any definitive ruling from the court until late-April and allows Argentina to keep servicing its debt.

Argentine bond yield spreads over U.S. Treasuries tightened 51 basis points to 1,255 bps on the EMBI Global index while the main 2017 dollar bond rose half a percent to trade at 74 cents on the dollar, the highest level in a week.

Argentine discount bonds rose almost a whole point .

Data from Markit showed a fall in debt insurance costs too, with five-year credit default swaps (CDS) falling more than 300 bps to 3,087 bps while one-year CDS dropped more than 500 bps.

Argentina has restructured 92 percent of its debt via past exchanges, with holders receiving 25 to 29 cents on the dollar, but hedge funds NML Capital, a subsidiary of Elliott Capital Management and Aurelius Capital Management are demanding to be paid in full.

"The reason bonds are rallying is that the court accepted Argentina's proposal and asked Elliott to respond. This shows some sympathy to resolving this issue in a non-default way," said one fund manager in London.

"I expect Argentina to make payments until there is actually a legal ruling against them."

Argentina's Vice-President Amado Boudou said at the weekend that the country would keep honouring its debt irrespective of the outcome of the legal battle, prompting many to speculate that Buenos Aires was mulling alternative ways of paying exchange bondholders.

"Boudou was very vocal in saying they will keep servicing restructured debt and that was a strong signal," Butikofer said. (Reporting by Sujata Rao; Editing by Catherine Evans)

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