It is often thought that bonds are among the most perverse instruments, rallying on bad news. And Venezuelan bond yields have dived so much of late on the news about the deteriorating health of the country’s incumbent president Hugo Chavez that it seems perversity comes in many forms.

Chavez, not known as the most market-friendly of presidents,  has been in the spotlight of late following radiation therapy for pelvic cancer in Cuba, raising fears he could be weakened ahead of a re-election bid on October 7. Chavez announced in June 2011 that he was being treated for cancer. Since then he has had three chemotherapy sessions in Cuba and one in Venezuela.

Perversely, Venezuelan bonds have rallied. Venezuela’s benchmark 2027 bond is quoted at 86 cents to the dollar, much above the 65 cents level it was at before Chavez’s surgery, with yields falling from around 13 percent in July to 11.2 percent in March.

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Fund managers at an Emerging Markets Trade Association (EMTA) conference in London last week said they were bullish on Venezuela, claiming it was undervalued given the untapped oil resources it holds and that it has been a “huge underperformer for so long.”

Frontier markets broker Exotix was more cautious.

Last week’s news that Chavez will return to Cuba for more cancer treatment saw the bonds extend their recent rally. However, we caution that a scenario where Chavez does not run is potentially more destabilising in the near-term than one where he does.