LONDON, April 3 Argentine credit default swaps and bond yields fell sharply on Wednesday on signs a technical default should not take place at least until June, when the next coupon payment comes due on its restructured bonds.
The country made a scheduled coupon payment on its 2038 Par bonds and will pay interest on its 2015 Boden bonds later on Wednesday, an economy ministry spokeswoman said.
Markets were also supported by a New York court's demand on Tuesday that hedge fund creditors consider Argentina's payment proposal. The funds, which are suing Argentina for $1.3 billion in payments on defaulted bonds, have until April 22 to respond to the payment offer.
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 and allows Argentina to keep servicing its restructured debt.
"The reason bonds are rallying is that the court accepted Argentina's proposal and asked (hedge fund) 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."
Argentine bond yield spreads over U.S. Treasuries tightened 36 basis points to 1,271 bps on the EMBI Global index while the main 2017 dollar bond rose half a percent to trade at around 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.
On Argentina's over-the-counter bond market, the bid price for dollar-denominated Par bonds surged 6 percent in midday trade, while the Global 2017 bonds gained 2.7 percent .
The Par, Discount and Global 2017 bonds were issued during debt exchanges in 2005 and 2010, and were accepted by about 92 percent of creditors affected by the country's 2002 default.
Creditors who entered the debt exchanges received 25 to 29 cents on the dollar for their defaulted bonds, but hedge funds NML Capital, a subsidiary of Elliott Capital Management, and Aurelius Capital Management are demanding to be paid in full.
Two U.S. courts have said Argentina must fully repay these creditors when it next services its restructured debt, but Argentine officials say this is impossible since they are barred by law from bettering the terms of the previous swaps.
Argentina's Vice President Amado Boudou said over the weekend that the country would keep honoring its debt irrespective of the outcome of the legal battle, prompting many to speculate that Buenos Aires was mulling alternative ways of paying exchange bond holders.
"Boudou was very vocal in saying they will keep servicing restructured debt and that was a strong signal," said Jean-Dominique Butikofer, head of emerging markets fixed income at UBP in Zurich.