Lisa Abramowicz: It's hard to quit Venezuela
Bond traders have neither morals nor memory, at least when it
comes to buying and selling Latin American sovereign debt.-Jon Shazar
The U.S. wants bond buyers to hate Venezuela's debt . So do many human rights activists, who are appalled by the nation's collapse into hunger and civil unrest under its oppressive ruler.
And yet investors have actually been warming up to Venezuelan bonds in the past week. The nation's dollar-denominated debt has gained nearly 1 percent in the period, while notes of the state-owned Petroleos de Venezuela have returned 1.7 percent. These gains come despite increasingly venomous language from the White House that culminated on Friday with an announcement of new sanctions, which target the nation's securities.
Venezuelan bonds are yielding the most versus Treasuries since at least 2006
The extra yield investors are earning on Venezuelan 10-year bonds versus similarly-dated U.S. Treasuries
Investors have some legitimate financial reasons to be buyers. The South American nation's debt is paying yields that are nearly 29 percentage points higher than those on similarly dated U.S. Treasuries, about the most in data going back to 2006. The president, Nicolas Maduro, has shown a willingness to deprive his citizens of food to avoid defaulting on this debt, which has prompted one Harvard University academic to label these assets "hunger bonds."
Venezuela's economy has been thrown into recession in the wake of severe political turmoil
Venezuela's GDP (YoY%)
2016 and 2017 figures are estimates based on analysts surveyed by Bloomberg; no data was available for 2015
And there's the influence of other powers, namely Russia and China, which have both propped up the government by extending loans to help keep it from defaulting on its debt. In fact, there's talk that China is helping the Venezuelan government make coming debt payments, Shamaila Khan, director of emerging market debt at AllianceBernstein, said in a Bloomberg Radio interview Friday .
Meanwhile, anyone who's been plowing money into emerging-market bond funds recently is most likely also investing in Venezuela because its debt makes up about 2 percent of a main broad benchmark that many EM investors use as a guide.
The specter of U.S. sanctions hasn't scared investors away from Venezuela's bonds
Prices on 8.5% bonds of Petroleos de Venezuela maturing in 2020
Source: Finra's Trace bond-price reporting, Bloomberg
While there have been reports that the benchmark's creator, JPMorgan Chase & Co., may be forced to remove the nation from the index, early indications appear to contradict that. U.S. sanctions would prevent investors from buying newly sold bonds and equities from the country, not all existing ones. For example, even the controversial bonds that Goldman Sachs Asset Management bought several months ago would be permissible to buy under the new guidelines.
As long as money continues to flow into developing markets the way it has this year, plenty of cash will be sloshing around to purchase these notes. While the rally in the nation's notes seems to be contrary to the rhetoric out of the White House and activists, investors have little financial incentive to stop buying.
It's tempting to say that all bond buyers should just stay away from the notes to protest Venezuela's lamentable conditions. But in reality, investing decisions rarely come from the heart, and the head has a tough time saying no to real money.
Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010. Petroleumworld does not necessarily share these views.
This commentary was originally published by Bloomberg, 08/25/2017.
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Petroleumworld News 08/28/2017
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