Argentina
Paul,
LEBAC TRS
Argentina's equivalent to US Treasury Bills are called Lebacs, and they are currently yielding 28%. These bonds are inaccessible to most investors, which is why there is a favorable discount vs. the Argy euroclear bonds (yielding —23%). By using the balance sheet of a local branch of JPM's Investment Bank, we have been able to buy the bonds through total return swap (TRS).
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The Lebac 0%07/18/18 @ 83.75, is a zero coupon bond that matures at par. The bond is denominated in ARS so you have full currency risk, but given the carry you receive over such a short time frame, it's a risk we are comfortable with. Our investment bank is neutral on the currency with a forecast that it weakens to 18.50 by next June, a 5% pullback from today's level —17.60. If this ARS depreciation plays out, you still return approximately 20% annualized yield. The funding on the TRS is 3mL+175bps. Initial margin is running at 40%.
Christian Petro | Executive Director | Global Investment Opportunities Group
J.P. Morgan Securities LLC | J.P. Morgan Chase Bank N.A.
320 Park Avenue - 14th Floor, New York, NY 10022
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NOT AN OFFICIAL CONFIRMATION: For informational purposes only. This report does not represent an official account of the holdings, balances, or transactions made in your account and is being provided at your request. Please refer to your monthly account statement for the official record of all of your account activities. For question, please call your J.P. Morgan representative.
ARS idea came from both JPM and DB in Nov/Dec 2017.
Attached is the DB research piece. See bottom of page 2.
Below is the initial JPM pitch. The second attachment is them re-iterating the trade in early January.
UBS later came out with ARS as their top pick for 2018.
Both were recommending long LEBAC (local t-bills) but we ended up doing it via the FX NDFs as DB could not get the final approval for a total return swap on the LEBACs.
Thesis was that they expected the currency to weaken —5% but the carry was around 25%, so targeting around —20% annualized TR.
I averaged in over 3 tranches of $3MM each between Nov and Dec. The central bank surprised the market and cut rates/increasedinflation target in January. ARS started to weaken and I cut half the position in January. Things were then very stable until early May when ARS gapped weaker on USD strength. I closed the remaining $4.5MM.
For what it is worth both JPM and DB recommended that we hold the position even though it fell another 15% since I unwound it.
Paul Barrett
Alpha Group Capital LLC
142 W 57th Street, 11th Floor, New York, NY 10019