(Bloomberg) -- The rally in Argentine assets showed signs of wavering as lawmakers kick back against President Javier Milei’s package of pro-market reforms designed to drag the serial-defaulter out of its deepening economic crisis. 

Benchmark dollar notes due in 2030 have fallen for six of the past seven sessions, hitting their lowest in two months. While they rebounded on Monday, leading emerging-market gains, the bonds are still well off a high of almost 60 cents on the dollar reached in late April. The parallel exchange rate, known as the blue-chip swap, has fallen some 5% against the greenback in June. 

Lawmakers are looking to water down Milei’s so-called omnibus bill — an attempt to raise taxes and slash spending in the face of collapsing economic output. The push-back is a reality check for Wall Street, which had cheered the administration’s efforts to squash triple-digit inflation and balance the budget, pushing the 2030 bond up from 26.7 cents in October.

“There are more people now who see that this is actually much more difficult for this administration than it seemed,” said Diego Ferro, founder of M2M Capital in New York, a long-time skeptic of Argentina bonds.

Opposition senators want to remove proposals that would force more workers to pay income taxes, expand the president’s executive powers and privatize state-owned companies like Aerolineas Argentinas from the omnibus bill, Bloomberg reported Wednesday. The package will be debated on the Senate floor June 12.

If two-thirds of senators vote down those key chapters, the lower house would need the same proportion of lawmakers to undo the changes if the bill is sent back to that chamber. That’s difficult given that Milei’s party holds only 15% of lower house seats. 

Second Thoughts

Argentina’s sovereign bonds handed investors losses of about 13% in the last month, the worst-performers in emerging markets over that period, according to a Bloomberg index. 

The extra yield that investors demand to hold Argentine debt over similar US Treasuries has climbed to 1,581 basis points in that same span, partially erasing the positive move seen during Milei’s term, according to a JPMorgan Index. The widening exceeds even that of South Africa, India and Mexico, all of which have been roiled by election results in the past few weeks.

The bonds’ decline is also being driven by the deepening economic crisis. Construction activity slumped a whopping 37% in April from the year earlier, while industrial production dropped 16.6%. At the same time, annual inflation has accelerated to 289%.

The peso, meanwhile, has been hit in the parallel market by a slowdown in dollar purchases from the central bank. Monetary authorities have gone from an average of buying $150 million in the FX market per day from May 13 to 17 to an average of $37.5 million per day in the five business days ending on June 4, according to estimates from BancTrust & Co. Strategists Ramiro Blazquez and Federico Cuba. 

“This is critical for bondholders because Argentina is not expected to have access to capital markets until after its 2025 midterm elections and will need to pay its creditors using the reserves it builds,” Blazquez said, adding that he remains overweight on Argentina’s credits. 

But it’s Milei’s fraught relationship with congress that remains top of investors’ minds. The government has achieved four consecutive months of budget surplus through April through emergency measures that didn’t go through congress. For that improvement to become sustainable, Milei needs to find a way to work with lawmakers. 

Bank of America analysts echoed that sentiment in a Monday note, writing that getting the reforms through congress would “show a minimum level of governability.” The firm told clients to buy sovereign bonds due 2038, adding that the recent slide in prices presented “a buying opportunity.”

“The passage of the omnibus bill and fiscal package will be a very important signal to us that the fiscal adjustments are structural in nature,” said Christine Reed, an emerging-markets local currency debt portfolio manager Ninety One North America Inc. The firm is overweight on Argentina’s sovereign dollar bonds. 

While the base-case scenario for many is that Milei’s proposals will pass, there’s concern over what cost that will come at. 

“He will have to do some horse trading to get things done,” said Ray Zucaro, chief investment officer at RVX Asset Management LLC in Miami, adding that he’s still long on Argentina’s bonds. “The honeymoon, if you will, is closer to being over than beginning.” 

--With assistance from Vinícius Andrade and Michael O'Boyle.

(Updates to add Bank of America note in 13th paragraph)

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