The Big Idea
Argentina | New attention to BOPREAL bonds
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Argentina’s BOPREAL bonds have drawn new attention with plans to re-open the 2026 Series 3 issue for an additional $1.8 billion. Although maturing in dollars and intended to alleviate US dollar demand, they trade in the secondary market under Euroclear settlement and local law jurisdiction with select inclusion in emerging markets indices. The unique feature of these bonds is that counterparty risk is not to the treasury but to the central bank. This matters for a country prone to default with weak liquidity and solvency ratios. The shorter tenor bonds from 2025 to 2027 also isolate repayment risk through the policy orthodoxy of the Milei term. There has been crossover support for the BOPREAL from international investors that see them as having a first claim to foreign exchange reserves, giving them better dollar access and lower repayment risk.
The BOPREAL bonds have emerged as new US dollar bond issuance with unique characteristics that have broadened demand from international investors. They have also and created indirect access through the secondary market. The official guide is available on the central bank website (table below).
These bonds offer some defensive attributes for those more cautious investors that value the central bank counterparty risk. The central bank has an untested repayment record but also logically would have first recourse to scarce foreign exchange reserves. There was a notable exclusion of BOPREAL bonds (maturities less than 1Y) on the most narrow calculation of net foreign exchange reserves in a recent central bank presentation along with other senior liabilities including the BIS swap line, treasury deposits, China swap line and private sector bank reserve requirements. Tight liquidity constraints remain relevant with foreign exchange reserves still in negative territory at $4 billion on the narrowest definition, which excludes the central bank and treasury deposit claims. This perceived senior status explains the much lower BOPREAL yield curve that trades well inside the Eurobond curve. However, both curves remains inverted at distressed levels with potential for a downward shift on successful economic stabilization through this year.
Source: https://www.bcra.gob.ar/PublicacionesEstadisticas/Guia-para-importadores.asp
There is also varying attributes across the BOPREAL bonds including liquidity, tax and payment considerations that explain divergent relative valuations. There are several bonds maturing in 2025, 2026 and 2027 with the latter offering several series of stripped A, B, C and D tranches. The zero coupon BOPREAL’25 bonds trade the tightest on the front-loaded sinking fund repayment schedule that begins in July (coincident to the ARGENT’30 bonds) with monthly payments through June 2025. These front-loaded payments are relevant for the still uncertain multi-year economic stabilization trajectory that deeply discounts the backloaded payments. They are also the primary vehicle for local investors to access US dollars with strong demand that explains the highest cash price and near normalized yields. The offshore investors would naturally focus on the higher yielding 2026 and 2027 maturities. The 2026 bonds offer 3% annual coupons on a quarterly basis with three sinking fund payments from November 2025 through May 2026. The 2027 bonds are more complex with the first three A, B and C series subject to a buyback option and partly allowed to cancel tax payments at par USD value (beginning April 2025). The stripped A and B series represent shorter 1Y and 2Y respective maturities.
There are quite a few relative value considerations. The shorter maturity BOPREAL bonds through 2027 all front-load payments uniquely through the policy orthodoxy of the Milei administration. The BOPREAL curve trades 420 bp to 540 bp inside the Eurobond curve for similar duration bonds. There is clear segmentation between a short maturity curve through 2027 with only limited overlap on the 2029 and 2030 sinking fund Eurobonds. The BOPREAL’2025 merits exclusion for its aggressive monthly sinking fund feature that near normalizes valuations and serves primary as US dollar supply for local investors. The primary explanation for the divergent credit risk between BOPREAL and Eurobonds is the counterparty risk between the central bank and the treasury that compensates against the local law status while also inferring stronger access to USD liquidity and stronger repayment risks.
These bonds were primarily a vehicle to satisfy local US dollar demand; however, there is also a unique opportunity for foreign investors to access still high sovereign yields with more defensive counterparty risk. The 2026 trade at a spread discount for their lower cash price relative to the 2027 series bonds. The 2027s offer slightly more defensive characteristics for the ability to partially pay tax obligations. This would provide a floor of support on the downside (implied buyback) as well as potential higher domestic investor demand closer to the April tax payments. The put option offers less value at low cash prices for the 2027 BOPREAL bonds and the still tight US dollar liquidity metrics. There has already been impressive gains year-to-date in sync with broader sovereign credit risk for the BOPREAL bonds. The scenario for economic stabilization over the next 12 months suggests still significant passive 12% to 16% total returns or more ambitious total return profile under bullish curve steepening. The BOPREAL bonds would be vulnerable to mark to market risk on any bearish macro scenarios; however the counterparty risk would ultimately determine the repayment risk on the longer investment trajectory on holding until final maturity. The counterparty risk may also encourage incremental local demand over the next 6-12 months as the shorter maturity bonds increasingly offer a US dollar hedge for local investors (similar to the BOPREAL’2025).
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