The Central Bank has once again enabled banks to place peso investments in Mutual Funds, after a surprise rate hike that aimed to contain dollar prices sparked controversy this week. This way, the BCRA gave a hand to banks, as interest rates were outdated and they were starting to hurt from investments exiting from fixed-term deposits and heading to Mutual Funds.
Therefore, the rate that had gone up to 68.4% dropped by 7.2 points to end up at 61.2%.
Meanwhile, the BCRA’s announcement also informed that they “enabled financial entities to conduct guaranteed loans –passive– operations to take pesos in stock exchange and markets authorized by the country’s market regulation office (CNV).
Likewise, it also adds that the goal is “to improve the mechanism to transfer the BCRA-set reference rate established by the BCRA Board to short-term rates within the financial system.”
On Thursday, after hearing complaints and concerns from the banks regarding the unloading of positions, the BCRA trimmed the raise that on Monday had taken it to an equivalent of 95% of the seven-day repo rate for banks, bringing it down to 85%, halfway from the original 75%.
The rates controversy
The Central Bank had made a surprise raise of the seven-day repo rates to Mutual Funds from 54% to 68.4% (and a resulting TNA of 98.1%), making bank products less appealing. Fixed-term deposits and interest-bearing accounts, the most popular products among small clients, were the most affected. Just as the market expected, on Monday and Tuesday there was considerable migration of these products to Money Market funds.
“One-day repo notes for AR$127.1 billion were made on Monday, and for AR$445.9 billion on Tuesday. This way, the repo note stock of Mutual Funds equals 18% of the total market of AR$2.46 trillion from basically zero –the January average was AR$740 millions”, said sources at Portfolio Personal Inversiones.
The loss of income that followed this rate hike generated unease in the banking sector. “This explains the very uneven yield among Mutual Funds,” said economist Salvador Vitelli. The money market and short-term liquidity funds had greater appeal, which guaranteed that a large amount of cash would flow into those investment vehicles. It’s worth considering that this decision not only hurt banks directly but also caused a drop in stock value, which they recovered yesterday when market rumors started to circulate about changes in this Central Bank decision.
According to data from the Argentine Chamber of Mutual Investment Funds (CAFCI), T+0 funds finished 2022 managing AR$3.61 trillion, increasing its assets under management more than 50% compared to 2021. T+1 funds doubled their assets under management, from AR$312.3 billion to the current AR$647.9 billion.
On an aggregated level, money market funds represent more than half the Mutual Funds industry’s assets under management. According to a PPI report, Money Market funds (T+0), which represent only 7% of the total amount of funds, accounted for more than 54% of the mutual funds industry’s total net equity by December 2022.
If the Central Bank hadn’t made this decision to adjust the rate of passive repos, the remaining alternative to avoid migration was to increase the reference rate for fixed-terms, which is already at 75% annual nominal, with a monthly yield of 6.16%, one of the best options in the face of an inflation rate of 5%. However, the market and, obviously, the Central Bank cut this option short.
This “achievement” by the banks is not accidental. According to operator Pedro Siaba Serrate of PPI, “the banking sector is the government’s main ally when it comes to refinancing debt in pesos, and we suspect that it played a fundamental role in the last debt swap in the first quarter.” Consequently, this change resulted in a kind of “uncertainty regarding the banks’ collaboration in future debt operations.”
The Central Bank aims to close the first month of the year with guaranteed funding to cover a maturity of around AR$100 billion and get more to finance the deficit.
Today’s operation consists of the reopening of four instruments. In the first place, the group of three “LEDE” bonds maturing in the second quarter of the year (S28A3/S31Y3/S30J3), whose yield on Wednesday was 113.4%, 114.5% and 116.5%, respectively, in the secondary market. The Treasury is also once again offering a “Dollar linked” bond for importers.
The benefit for deposit holders
For deposit holders, the doubt regarding what to do with the pesos became stronger with the spike of the “blue dollar” rate early this month. For this reason, the organization led by Miguel Pesce seeks to contain liquidity and tempt deposit holders with investments in pesos.
After negotiating with the banks, the Central Bank ended up defusing the appeal of Mutual Investment Funds. “Now the spread is already significant to dispense of liquidity and remain in fixed-term deposits immobilizing the money. That’s the hand of the lobby that was made with these measures and how the thing was agreed upon. The truth is that for deposit holders it is not good news because ultimately they could have placed with mutual funds with immediate liquidity at a better rate than now, but the banks did not see themselves as benefiting from this,” explained Salvador Vitelli.
The Central Bank lowered the applicable coefficient from 95% to 85%. This means going from an annual nominal rate (ANR) of 68.4% to 61.2%. “In addition, this allows taking guaranteed loans in the market. We estimate this will put a minimum on the guarantee rate of approximately 66.2% ANR. Banks are now allowed to take guaranteed loans with their own portfolio, only taxed with Gross Income.”
“The mutual funds rate and the fixed-term deposits differ from each other: 84.3% EAR v. 107.1% EAR. Therefore, the appeal of going from fixed-term deposits to mutual funds decreases,” the economist concluded.