Argentine bonds are posting the second-biggest monthly

The South American country’s dollar bonds returned 7 percent this month, the biggest advance after Ecuador’s 15 percent gain, according to JPMorgan Chase & Co.’s benchmark EMBI+ index.

A record 55-million metric ton soybean harvest helped push reserves up 8 percent this year to $51.7 billion, an all-time high. Soy exports, the largest source of dollar inflows, may rise $700 million this year to $8.4 billion, said Gustavo Lopez, a former director of the government’s agricultural markets office who is now an analyst at Agritrend SA. Fernandez took $5 billion of reserves this year to pay bondholders and plans to use another $7.5 billion in 2011.

“Higher exports due to larger harvests and higher prices extend the horizon of the current account and allow you to continue to tap reserves,” said Marina Dal Poggetto, a partner at Estudio Bein & Asociados, a Buenos Aires research company founded by former Deputy Economy Minister Miguel Bein.

Revenue from Argentine commodity exports, including soybeans, corn, wheat and sunflower seeds, will increase 8 percent to $28 billion during the 2011 harvest, Agritrend’s Lopez said in an interview in Buenos Aires.

Corn prices rose to a two-year high last week of $5.88 a bushel, while soybeans climbed to $12.145, a 16-month high, on the Chicago Board of Trade. Argentina is the world’s second- biggest corn exporter after the U.S. and the third-largest soy exporter.

‘Constructive Elements’

The 2010-2011 corn harvest, which is being planted in Argentina, will reach a record 26 million tons, Agricultural Undersecretary Oscar Solis said Oct. 4.

“Good harvest and high prices are constructive elements as never seen before,” said Guillermo Nielsen, a former finance secretary who oversaw Argentina’s defaulted debt exchange in 2005 and is now a consultant in Buenos Aires.

Policy makers finance these reserve purchases by issuing local debt paying about 12 percent to 14 percent, above the official inflation rate of 11.1 percent, according to Miguel Kiguel, the 56-year-old former finance undersecretary who runs research company Econviews, said in a phone interview from Buenos Aires.

Paying debt with reserves also fuels inflation by freeing up budget money for other uses, said Claudio Loser, a former International Monetary Fund official, in a Sept. 22 interview.

GDP Warrants

Warrants linked to growth in South America’s second-biggest economy fell 0.35 cent yesterday to 12.43 cents, according to data compiled by Bloomberg. Argentina’s economy will expand 9.5 percent this year, the most since 1992, according to the central bank.

The peso dropped 0.1 percent to 3.9571 per U.S. dollar.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps climbed 16 basis points to 748, according to data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

Arcor SAIC, the country’s biggest candy maker, plans to sell $200 million of overseas bonds due in 2017, Fitch Ratings Inc. said Oct. 18.

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries widened 18 basis points to 602 yesterday, according to JPMorgan. It is down from 846 on July 1. Argentine debt is the highest yielding in JPMorgan’s EMBI+ index after Venezuela and Ecuador.

Argentine bonds will extend their rally after Federal Reserve Chairman Ben S. Bernanke signaled more so-called quantitative easing is likely, boosting demand for higher- yielding emerging-market assets, Nielsen said.