Argentina's policy overhaul brings milestone return to debt markets step closer, analysts say

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Milei's economic reforms tie peso to inflation

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Analysts see potential for Argentina's market return

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Central bank aims to boost FX reserves by $17 billion

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Argentina's ninth sovereign default occurred in 2020

(Adds bond price moves in paragraph 6)

By Marc Jones

LONDON, Dec 16 (Reuters) - Currency market changes announced by Argentina, aimed at rebuilding FX reserves, pave the way for the country to make its long-awaited return to international borrowing markets early next year, Wall Street investment bankers predict.

President Javier Milei's radical overhaul of Argentina's economy took another big step on Monday as the central bank announced it would start tying the peso's trading band to inflation from the start of next year.

A primary goal is to accumulate foreign currency reserves - something investors have long hoped to see. Analysts see it as important for regaining access to capital markets that Argentina lost during its ninth sovereign default in 2020.

"This should make for a seamless second IMF review," Morgan Stanley analyst Simon Waever said in a research note, referring to the International Monetary Fund.

"It also increases the likelihood of external market access, perhaps even sooner than the second quarter of 2026."

The country's dollar bonds cheered the moves, with issuances maturing between 2030 and 2046 up over a cent in price on Tuesday. The 2030 rose 1.5 cents to trade at 84.75 cents on the dollar, according to LSEG data.

NEW BOND ISSUE WOULD MARK CONFIDENCE IN REFORMS

Argentina last issued a new international market bond in 2018 under then-President Mauricio Macri. A successful return next year would mark a key vote of confidence for Milei's reform drive and restore its standing on international markets.

JPMorgan analysts were also encouraged by Monday's measures, saying they showed the country continues to move in the right direction and would "reinforce the case for market access for foreign law FX bonds in the near term."

Argentina's central bank said its new arrangement aims to purchase up to $10 billion, with a potential overall reserve accumulation of $17 billion, depending on balance of payments flows.

"Overall, we see the central bank's move toward a more flexible exchange-rate regime that allows greater leeway for the currency to weaken, as positive," said Sergio Armella, senior economist at Goldman Sachs, in a client note.

"The announced reserve accumulation program also represents a positive development," he added.

"In our assessment, the (central bank's) decision to prioritize the accumulation of international reserves, while maintaining its focus on reducing inflation, could improve the outlook for medium-term sustainability of the economic program being implemented by President Milei."

INTERNATIONAL BONDS RISE THIS YEAR

Argentina's international bonds are up 16% this year at the index level, edging out JPMorgan's EMBIGD index by two percentage points, with most of the gains coming after Milei's party's unexpected win in the October midterm elections.

Bond yields are hovering around 10%, with spreads to U.S. Treasuries dropping to near their tightest in years.

A full return to capital markets would cap a dramatic turnaround in sentiment since October's run on the peso when midterm election uncertainty sparked fears about the future of Milei's reform programme and forced the government to seek a $20 billion lifeline from U.S. President Donald Trump.

"Our base case from here is that important structural reforms are passed in the next few months ... which will drive yields lower when added to gradual FX reserve accumulation," Waever said.

It could pave the way for a seven- to 12-year bond worth a minimum $3 billion to cover $2.8 billion of debt payments due in July, while the bond's 'coupon' as it is known, could be close to 9.5%, he added.

"Most likely timing would be end-2Q26, but it's possible that it happens even earlier," Waever said. (Reporting by Marc Jones; additional reporting by Rodrigo Campos; editing by Karin Strohecker, Nick Zieminski, Rod Nickel)