Argentina Election Rattled Markets. Beaten Down Bonds Could Be Worth a Look.

There is hope an Argentine government scandal fades before the midterms, some analysts say. (EMILIANO LASALVIA/AFP via Getty Images)

Juan Peron had his Evita. Javier Milei has his younger sister Karina—another woman behind the throne thrust center stage at a critical point in Argentina’s frustrating history.

Deftly timed corruption allegations against Karina, whom the chainsaw-wielding president installed as his chief of staff on Day One, probably contributed to the shellacking Milei’s Liberty Advances party sustained in elections in Buenos Aires province on Sept. 7.

Investors took the result as a harbinger for national midterm polls pending on Oct. 26 and fled Argentine assets. Sovereign bonds maturing in 2029 plunged from 77 to 72 cents on the dollar, their lowest point this year. The peso sank 5% to 1,423 to the dollar, perilously close to the government’s self-imposed upper limit of 1,468.

“We suffered a setback, and we must accept it responsibly,” Milei commented in a rare contrite moment. “If we’ve made political mistakes, we are going to internalize them.”

Such a look within can’t avoid the first sister.

Markets expected Milei to lose in BA province, where Rust Belt towns surrounding the national capital have long been a stronghold for his Peronist opponents. Bonds had priced in a 5% margin, says Jeff Grills, head of emerging markets debt at Aegon Asset Management. Instead, the gulf was 13%.

A few weeks before election day, a streaming news channel aired an audio tape that seemed to feature the former head of Argentina’s National Disability Agency describing kickbacks that Karina Milei collected on drug purchases. Hardly slam-dunk evidence. But it sounded enough like business as usual for football fans to start chanting “3 percent,” the measure of Karina’s alleged cut.

That cost her big brother at the ballot box, says Arthur Budaghyan, chief emerging markets strategist at BCA Research. “The electorate still supports Milei’s austerity program,” he says. “The government did very poorly because of the corruption scandal.”

That’s not the only way Karina, two years Javier’s junior at 52, is hurting the family ticket, adds Bruno Binetti, a fellow with Chatham House’s Americas Program. Milei’s truculent rhetoric and rise from outside the political establishment inevitably draw comparisons with Donald Trump. The political math he faces is diametrically opposite, though.

As a newly hatched party, Liberty Advances has negligible representation in Argentina’s Congress. That’s forced Milei to compromise and wheedle to push through his ambitious stabilization program. “Milei is a pragmatist at heart when he needs to be,” says Gustavo Medeiros, head of research at emerging markets investor Ashmore Group.

Milei will still command a minority in Congress even with the best midterm results. Only half the lower house and one-third of the Senate are up for reelection. So he will need continued outreach to center-right legislators and sympathetic governors to move on structural reforms affecting privatization, labor law and taxes, to name a few. Karina has been pushing a subservient role for these partners, provoking more-or-less public conflict with Javier’s other senior advisor, Santiago Caputo, Binetti says.

“There’s open war between the two of them,” he says. “The government needs to show it can regain internal coherence and rebuild coalitions.”

No one expects the never-married President Milei to fire his beloved sibling, whom he habitually calls “the boss.”

“It’s clear to everyone that he and his sister are practically the same person,” Binetti says.

There is hope that the scandal will fade before the midterms, and Milei can refocus voters on his extraordinary achievement in taming runaway inflation. “Buenos Aires is a setback, not a knockout,” says Trevor Yates, senior investment analyst at Global X ETFs, which manages the Global X Argentina exchange-traded fund. It has fallen 9% since the Buenos Aires election.

Investors are setting the bar for success in late October at one-third of the lower house for Liberty Advances, which would block Congress from overriding Milei’s vetoes and insulate him against potential impeachment. “If he doesn’t get a third, he’s curtains,” Aegon’s Grills predicts.

Ashmore’s Medeiros likes the political odds well enough to look at buying Argentine bonds at current knocked-down prices. The paper is priced for a restructuring before the end of Milei’s term in late 2027, which is highly unlikely, he argues. “There are not a lot of stories where you can get this kind of carry for the next two years,” he says.

Other investors are more cautious. The most immediate danger is that the peso breaches the government’s exchange rate band, forcing the government to sell scarce dollar reserves or risk a run on the national currency. Inflation is hardly whipped yet, running at more than 30% annually.

“There could be another 10 to 15 points of downside in the bonds before midterms,” Jeff Grills predicts. “It’s definitely going to be an ugly six weeks.”

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