Global Investing

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.

Election test for Venezuela bond fans

Investors who have been buying up Venezuelan bonds in hopes of an opposition victory in this weekend’s presidential election will be heartened by the results of a poll from Consultores 21 which shows Henrique Capriles having the edge on incumbent Hugo Chavez.  The survey shows the pro-market Capriles with 51.8 percent support among likely voters, an increase of 5.6 percentage points since a mid-September poll.

Venezuelan bonds have rallied hard ever since it became evident a few months back that Chavez, a socialist seeking a new six-year term, would face the toughest election battle of his 14-year rule. Year-to-date returns on Venezuelan debt are over 20 percent, or double the gains on the underlying bond index, JP Morgan’s EMBI Global. And the rally has taken yields on Venezuela’s most-traded 2027 dollar bond to around 10.5 percent, a drop of 250 basis points since the start of the year.

But Barclays analysts are advising clients to load up further by picking up long-tenor 2031 sovereign bonds or 2035 bonds issued by state oil firm PDVSA: