Country risk over 600 points as US hikes interest rates

The JPMorgan EMBI+ index for Argentina, known as "country risk," has been climbing in recent weeks. This is due to uncertainty surrounding Argentina's upcoming elections, recent economic data, and reduced purchases of reserves by the Central Bank. Recently, volatility in U.S. Treasury bonds has intensified this issue, with their yields reaching levels not seen in over two decades.

Argentine debt bonds issued under New York law experienced a drop of up to 4% in the past five trading sessions, pushing the country risk to 602 basis points by the end of the week. This was the highest level since April 2018. The index had been at 402 points earlier in July, marking its lowest point since that time. In the current month, it has increased by 22%.

Pablo Repetto, head of research at Aurum Valores, stated that the rise in country risk stems from both international and local factors. On the global stage, the increase is linked to the rise in risk-free interest rates, particularly in U.S. bonds. For instance, Treasuries in the 30-year segment reached a yield of 5.9%, the highest since 2004.

Higher U.S. rates make investing in Treasuries more attractive and less risky compared to emerging market bonds, causing a decline in the value of Argentine bonds. The dollar has strengthened, making dollar-denominated Argentine debt harder to repay. The rise in U.S. bond yields is attributed to various factors. Repetto noted that inflation in the U.S. remains strong, prompting predictions of the Federal Reserve continuing to raise interest rates.

There is a more than 64% chance that the Fed will increase the rate by 25 basis points at their October 28 meeting. A recent report by brokerage firm PPI suggests that the ongoing war in the Middle East, particularly Iran's involvement, could continue until the U.S. midterm elections in November. This situation raises inflation expectations in the short and medium term.

Additionally, the conflict with Iran obliges the U.S. government to keep financing the war, worsening the fiscal balance and increasing the cost of U.S. Treasury financing. The conflict also complicates the macroeconomic outlook for other countries, leading to sell-offs of sovereign debt in Japan and Europe. This makes their local yields more appealing, encouraging foreign holders of U.S. Treasuries to bring their capital back.

Lastly, Repetto highlighted that the continuous issuance of debt for artificial intelligence investments creates competition between corporate and government debt, affecting the global interest rate structure and impacting the sovereign debt of countries like Argentina. Local factors contributing to the rise in country risk include negative economic activity and poverty indicators, which have raised caution among investors.

In the first half of 2026, poverty in Argentina rose to 32%, while economic activity plummeted by 2.9% monthly in July. This weakness could significantly affect the "social mood" as electoral strategies begin to take shape. Repetto believes that while a country risk nearing 600 points is possible in a pre-electoral context, given the poor economic activity and poverty data, and the Central Bank's recent cuts to foreign currency purchases to strengthen reserves, 400 points is already quite low.