LONDON Argentine debt insurance costs and bond yields soared on Thursday after the first day of a U.S. appeals court hearing raised fears that the country is heading for its second huge default in 11 years.
Judges in New York said on Wednesday it was the court's job to "enforce contracts, not rewrite them", indicating the panel could ultimately uphold a previous ruling that instructed Argentina to pay all creditors in full, including those who refused to take part in past debt exchanges.
Argentine bond yield spreads on the EMBI Global dollar bond index blew out 73 basis points. That means investors are demanding 11.9 percentage points above U.S. Treasuries to hold Argentine risk, not far off the 3-year highs hit last October.
"The consensus from all the analyses of yesterday's hearing is that the ruling will go against Argentina and exchange bond-holders and that is the main takeaway...that this is headed for technical default," said Kevin Daly, a portfolio manager at Aberdeen Asset Management in London.
Argentina's 2017 dollar bond, which was issued as part of an earlier swap, fell 4 cents to trade at around 75.6 cents on the dollar, the lowest since end-November when technical default, later avoided, looked inevitable.
The yield rose 1.5 percentage points.
Investors fear that default could come as early as March 31 when Argentina is due to make a coupon payment on a par bond, should the U.S. court rule against it before that date.
Reflecting these fears, Argentine one-year credit default swaps jumped more than 800 basis points to 6,040 basis points, according to data provider Markit.
That indicates an annual cost of over $6 million (4 million pounds) to insure $10 million worth of exposure to Argentine debt, more than double the levels for one-year CDS at the start of the year.
Five-year CDS rose more than 300 basis points to 2538 when a December technical default, later avoided, looked inevitable.
The court heard more than two hours of arguments on Wednesday as it weighed whether to reverse an order that Argentina pay $1.3 billion to so-called holdout creditors, led by Elliott Management affiliate NML Capital Ltd and another fund Aurelius Capital Management.
A lawyer for Argentina stood by the government position that the holdouts should not be paid in full, and indicated the country could end up ignoring a court order requiring payment.
"The strong statement from Argentina's lawyer and the nature of the judges' interrogation give a more negative twist in that it again plays towards the plaintiffs and raises fear of default," said Stuart Culverhouse, head of research at Exotix, a brokerage in London.
Culverhouse is advising clients to buy so-called untendered bonds, those not offered into the two past rounds of Argentine debt restructuring. Including the holdings of NML and Aurelius, there are an estimated $6 billion of these outstanding.
Market players say this debt has doubled in price since October 2012 to trade at over 40 cents on the dollar.
"If the plaintiffs win, these bonds offer significant upside," Culverhouse said.
(Reporting by Sujata Rao; Editing by Toby Chopra, Ron Askew)