It turns out that the question of whether Argentina ever agrees to settle a decade-long dispute over its defaulted debt isn’t the only thing bondholders have to worry about.
That’s because striking a deal may require the country to issue more than $20 billion of notes to pay disgruntled creditors led by Elliott Management, as well as holders of its maturing debt, according to BlackRock and Schroders. And since many of the investors who’ve been seeking repayment since as far back as 2001 will likely dump the securities, a glut is all but assured, they say.
The distinct possibility of all that supply means one of the biggest bond rallies in the world may be over as Argentina’s economic woes and the prospects of higher U.S. interest rates repel investors, the money managers said. The nation’s defaulted foreign debt has jumped 26 percent in the past year on speculation the winner of presidential elections in October will end the creditor dispute.
“The risk-reward of Argentina has deteriorated quite a bit,” Pablo Goldberg, a money manager at BlackRock, which oversees $4.8 trillion globally, said Friday at a conference organized by trade group EMTA in New York.

Court Ban

President Cristina Fernandez de Kirchner, who can’t run for a third consecutive term, has been unwilling to negotiate with creditors who rejected Argentina’s efforts to renegotiate debt after its 2001 default and instead won the right to repayment in U.S. court.
In June, a U.S. judge banned the country from paying foreign obligations it issued in debt swaps until it pays New York-based Elliott. That decision plunged more of Argentina’s debt into default.
The legal saga -- coupled with sluggish growth and annual inflation of 30 percent -- has hurt demand for Argentina’s debt among investors who focus on emerging markets. Their holdings have hovered between neutral and underweight since January 2013, according to a JPMorgan Chase & Co. client survey.
Hedge funds have filled the void, with the likes of Soros Funds Management, Hayman Capital Management and Third Point piling in.

‘More Paper’

With these investors also poised to reduce their positions after a settlement, dedicated investors would have to boost holdings of Argentine debt to overweight to soak up all the bonds hitting the market, said Stone Harbor Investment Partners LP’s Stuart Sclater-Booth.
“There is no need to buy at these levels when you know that there will be plenty of chances to get more paper when they issue,” Sclater-Booth, a money manager at New York-based Stone Harbor, which oversees more than $50 billion in assets, said in an e-mail.
He also estimates that the nation could issue about $20 billion in new bonds next year.
Argentina’s dollar bonds due in 2033 have climbed 19.8 cents on the dollar from 82.3 cents a year ago, data compiled by Bloomberg show.
“The expectations for Argentina are very high,” Iker Cabiedes, a JPMorgan economist, said from New York. “There’s downside if something goes wrong down the line. And if things go well, most of it is priced in.”

‘Manageable Concern’

Lucila Broide, a senior emerging-markets analyst at Oppenheimer & Co., said Argentina may stagger its debt sales to avoid overwhelming the market. The country hasn’t borrowed in international bond markets for over a decade.
The risk of a glut is “a manageable concern, and it’s in both parties’ interest to design it in a way that is profitable to everyone,” she said from New York.
If Argentina issues the new bonds under New York law, more investors would be able to buy them, potentially reducing the risk of oversupply, according to Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc.
Still, Jim Barrineau, a money manager at Schroders, said expectations the election and resolution with the holdouts will cause yields to plunge are unrealistic.
Investors “are underestimating the scope of the problems and underestimating the response that Argentina will take even if they do fix these problems to get unfettered financial access,” he said. “They will jam the market.”
(A previous version of this story was corrected to show that Lucila Broide is a senior emerging-markets analyst at Oppenheimer.)