(Bloomberg) -- Argentine bonds climbed to the highest in two years after President Javier Milei’s government unveiled the first batch of shock-therapy measures intended to quell skyrocketing inflation and stabilize the economy.

Benchmark overseas notes due in 2035 added as much as 1.4 cents to trade at 35 cents on the dollar, the strongest level since September 2021, according to indicative price data compiled by Bloomberg. Yields fell, though they still remain near 18% — signaling lingering concern over a sovereign default.

Other securities also climbed, bolstered by speculation that the country may have a path to jump-starting growth, as painful as the process may be for ordinary Argentines in the short term. In an ominous sign of the obstacles the new government faces, inflation accelerated more than expected to almost 161% in November, according to a report Wednesday.

The “shock therapy” package announced by Economy Minister Luis Caputo late Tuesday included devaluing the peso by more than 50%, along with massive cuts to government spending equivalent to almost 3% of gross domestic product. Caputo outlined plans to halve the number of ministries, cut transfers to provinces and suspend public works projects. Transport and energy subsidies would be slashed, with slight increases to some social programs to try to blunt the impact. 

Read More: Argentina Devalues Peso by 54% in First Batch of Shock Plans 

“Investors are taking the announcements as the first steps on the right direction,” said William Snead, a strategist at BBVA in New York. “There is a lot of enthusiasm — but the next couple of months will be key. Inflation will spike and lower spending should have an economic impact, then a reality check is due.”

The drastic measures are intended to salvage an economy battered by years of mismanagement and overspending. Argentina is headed to its sixth recession in a decade amid rampant inflation, while more than 40% of the population is mired in poverty. Outrage over the almost permanent state of crisis helped elect libertarian Milei, who won in a landslide promising radical change. 

While investors have welcomed Milei’s moves toward moderation — picking Wall Street veterans for his economic team, delaying a dollarization of the economy, and seemingly backing away from a promise to shut the central bank — some saw the initial measures announced Tuesday as not bold enough. Others pointed to potential backlash as the government pushes to implement disruptive measures that require Congressional support. 

“The initial focus on fiscal measures will provide comfort,” said Alejo Costa, chief Argentina strategist at Banco BTG Pactual SA. However, investors will soon “demand additional details to understand the full implications of the measures.”

Government officials said Argentina is targeting a slow weakening of the peso going forward, about 2% per month. 

The central bank maintained the benchmark Leliq rate at 133% while lowering the interest rate on one-day repo notes to 100% from 126%. The bank also said it would continue financing the government’s fiscal deficit while it seeks international credit options. It reiterated that Argentina will ask the IMF to waive upcoming debt repayments after the previous administration didn’t comply with targets agreed to with the Fund. 

Read more: ‘There Is No Money’: Argentina Begins Economic Shock Remedy 

Stocks, provinces

Assets aside from sovereign bonds posted more modest reactions. The lack of details on Milei’s plans for provinces — long seen as a safer way to get exposure to Argentine debt — helped damp demand for the notes, with debt from Entre Rios due in 2028 trading little changed around 76 cents on the dollar, while 2029 bonds from Cordoba hovered around 77 cents. 

The benchmark stock index, to which foreign investors have little access because of currency controls still in place, climbed as much as 7.4% before erasing its gains. The $105 million Global X MSCI Argentina ETF edged higher. It’s up nearly 50% this year.

High inflation means the currency may need to be devalued further. The blue-chip swap, the most commonly used measure among traders to gauge the market’s true value of the peso against the US dollar, was little changed at about 1,040 per dollar. 

“The devaluation will be eaten up relatively soon, especially as inflation will accelerate,” Citigroup strategists Ivan Riveros, Donato Guarino and Dirk Willer wrote in a note. While they welcomed the measures, they warned the nation will still need to roll over a record amount of its debt next year and reduce coupon payments.

“We suspect a more detailed plan will follow to anchor expectations, especially on the fiscal side,” the Citi strategists said.

--With assistance from Philip Sanders.

(Updates with latest inflation figures in third paragraph)

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