BUENOS AIRES, Oct 23 (Reuters) - Argentine bonds and stocks rallied on Friday on the prospect this weekend's election will bring about a more investor-friendly government that will free up the economy and end the country's legal battle with creditors, traders said.
Argentines vote on Sunday for a successor to leftist President Cristina Fernandez. All main candidates are expected to ease her interventionist policies, to a greater or lesser degree, and reach a deal with creditors suing the country over unpaid debt.
This upbeat outlook has fueled a cross-asset rally in Argentina this month despite the economy's stagnant growth, a rising fiscal deficit and relentless double-digit inflation.
On Friday, bonds inched up, with the 2038 Par bond gaining 0.26 percent to a five-month high of 61.00.
The blue chip Merval index closed up 1.8 percent, bringing its gains so far this year to around 32 percent.
"Domestic assets continue to be in demand by investors who still see them as attractive in the medium term," said Gustavo Ber, an analyst at Buenos Aires-based financial consultancy Studio Ber.
Argentine bond yields are as much as double those of neighboring countries due to messy defaults in the past 13 years and a long fight in U.S. courts with bondholders who refused to accept its debt restructuring.
"We believe that all three main presidential candidates have a 'willingness' to settle with the holdouts," wrote Barclays analysts Pilar Tavella and Sebastian Vargas in a note on Friday.
The Barclays analysts also wrote that they expected a devaluation of the official peso to 11.5 per dollar by year-end from 9.52 currently if front-runner and ruling party candidate Daniel Scioli wins the presidency.
The peso is currently trading at 16.06 per dollar on the black market, which has boomed since capital controls were introduced in 2011, a sign the official rate is inflated and a devaluation is necessary, many economists say.
These devaluation expectations are fueling demand for shares and dollar-denominated assets like Argentina's restructured sovereign bonds, traders said. (Reporting by Walter Bianchi and Sarah Marsh; Editing by Leslie Adler)