Venezuelan yields make it hard to stay away
The 60-70 basis-point post-election surge in Venezuela’s benchmark foreign currency bond yields is already starting to reverse.
Despite disappointment among many in the overseas investment world over a comfortable re-election in Venezuela of populist left-wing President Hugo Chavez on Sunday there are quite a few who are already wading in to buy back the government’s dollar bonds. Not surprising, as Venezuelan sovereign bonds yield some 10 percentage points on average over U.S. Treasuries and 700 basis points more than the EMBIG sovereign emerging bond index. It’s pretty hard to keep away from that sort of yield, especially when your pockets are full of cash, the U.S. Federal Reserve is pumping more in every month and Venezuela is full of expensive oil .
The feeling among investors clearly is that while a victory for opposition candidate Henrique Capriles would have been preferable, Chavez is not not a disaster either given that his policies are helping maintain a steady supply of thse high-yield bonds. And with oil prices over $110 a barrel, it is highly unlikely he will shirk on repaying debt.
Analysts at JPMorgan are among those who have moved Venezuelan bonds back to overweight in their model portfolio. They argue first of all that Chavez’s convincing win has removed the risk of post-election violence (a major fear in a country awash with guns) and second, they note the continued demand for high-spread assets:
The post-election market pull-back offers better levels to re-enter positions against a backdrop of ample global liquiditywhere Venezuela continues to look like an outlier if we compare its double-digit yields to the very low risk (in our view) of default in the foreseeable future.
Analysts at Morgan Stanley also advised clients to step back into the market:
The removal of the event risk associated with the election and attractive carry will support long positions through to year-end.
There are still gubernatorial elections in December and municipal polls in April, both of which have the potential to generate some political noise. However they are unlikely to deter investors who are on the lookout for high-spread assets to park their cash. Even ahead of the presidential election, Venezuela, with all its potential political risks, was investors’ biggest overweight sovereign position, JP Morgan’s monthly client survey found.
Venezuela is also one of the top performing credits this year in the EMBIG index, returning over 20 percent in the first nine months of 2012 ( the broader index returned a very respectable 15 percent). No wonder investors want more.