November 28, 2019 / 5:06 AM / 17 days ago

Argentine local bonds tumble ahead of index removal, Templeton may face losses

NEW YORK, Nov 28 (Reuters) - A trio of Argentine peso bonds have crashed sharply in price ahead of their scheduled removal from a key index, underscoring the fragility of the country’s debt and possibly dealing major holder Franklin Templeton a loss of over half a billion dollars.

Three Argentine peso bonds maturing in 2021, 2023 and 2026 have dropped between 23% and 65% from their price at the end of last month, just after Franklin Templeton raised its exposure to each of them by close to 50%.

The bonds are scheduled to be removed from JPMorgan’s GBI-EM Global and Narrow series on Friday after capital controls imposed by president Mauricio Macri’s administration in September deemed them ineligible.

The October 2021 bond dropped from 38.5 cents on Oct. 31 to 25.6 cents last week, before recovering slightly to 29.5 cents on Wednesday The October 2023 tumbled from 76 cents at the end of last month to 26 cents on Wednesday, according to Refinitiv data.

The October 2026 hit 26.25 cents Wednesday, from over 70 cents in early October and 35 cents as of Oct. 31.

According to the price drops and Franklin Templeton’s holdings as of Oct. 31, the declines amount to a paper loss of roughly $620 million across the large investor’s funds, according to a Reuters calculation.

All of the firm’s funds holding these bonds are managed or co-managed by Michael Hasenstab, who oversees several bond investment strategies and made his name with contrarian bets on unloved markets that yielded huge payouts.

The calculated paper losses in the Argentine bonds could be smaller if the funds exited their positions after Oct. 31, or a hedging strategy could be in place to soften the blow. Through its public relations firm, Franklin Templeton declined to comment.

The three bonds were put on a watch list back in September, when JPMorgan said their removal from the GBI-EM index series would depend on whether capital controls would remain in place by the end of the review period, which ends on Friday.

About $226 billion in assets is benchmarked to the GBI-EM suite of indices, JPMorgan said, based on a client survey.

Argentina, gearing up for a new president in December, is locked in knife edge restructuring talks with international creditors over around $100 billion in debt amid fears over a default.

Investors in Argentina have said that the local currency debt is the most vulnerable to sharp declines, since they can be written down by the government with the stroke of a pen.

Since center-left candidate Alberto Fernandez’s win in the August primary election Argentine assets have continued to crumble. The peso has lost nearly 25% of its value versus the dollar and the main stock index fell almost 50% before halving that decline.

Fernandez will be sworn in as president in two weeks.

Reporting by Rodrigo Campos in New York, additional reporting by Karin Strohecker and Marc Jones in London; Editing by Kim Coghill

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