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By Paul Kilby
NEW YORK, Jan 18 (IFR) - Order books on Argentina's two-part US dollar bond have already swelled to US$14bn ahead of expected pricing on Thursday.
Demand is expected to grow substantially overnight as investors turn their attention away from the string of sovereign trades seen in the market on Wednesday and focus on Argentina.
"There are a lot of large accounts that were busy with today's new issues and had not placed orders yet, since this is tomorrow's business," one source told IFR.
The country set initial price thoughts of high 5% on a five-year bond and low 7% on a 10-year. At those levels, Argentina is seen offering as much as 50bp in new issue premiums.
At 5.875%, the spread over Treasuries on a new five-year would be around 400bp versus a 350bp G-spread on the existing 2021s, noted one banker.
The 10-year is coming slightly tighter, assuming that low 7% translates into a Treasury spread of 475bp versus a G-spread of 433bp on the existing 2026s, the banker said.
Newman puts fair value on a new five year at 5.625%, and 7.125% on the 10-year tenor. "Inside that and we would not be too keen," he said.
Others still see value inside those levels given how much markets have rallied of late.
"If a 10-year came in the high 6s, that is still a lot of yield in today's credit market given how much emerging markets and US high yield have tightened," said Mark Hughes, a research analyst at Western Asset.
Even so, the buyside's willingness to bend on pricing may depend on their faith in the government's ability to keep a cap on external dollar supply this year.
"The big question will be: 'How much do they want to print?'" said Eddy Sternberg, EM portfolio manager at Loomis Sayles & Company.
The government appears to be managing expectations after announcing last week that it plans to sell between US$3bn-US$5bn - down from the US$10bn reported earlier in the year.
"They came out last week saying they are not planning to issue as much foreign currency debt as the market had expected," said Hughes. "That was positive for the credit."
How much Argentina issues in the external market may depend in part on the depth of its domestic market, which the government has worked to develop since it took office last December.
There are reasons to believe that the government goal of raising US$14bn through local instruments is achievable.
Not only are inflows from a recent tax amnesty expected to be invested in that market, but Argentina's inclusion on JP Morgan's emerging currency bond index will help bolster demand there.
Bookrunners are BBVA, Citigroup, Deutsche Bank, HSBC, JP Morgan and Santander. (Reporting by Paul Kilby; Editing by Marc Carnegie and Shankar Ramakrishnan)