UPDATE 1-Venezuelan debt prices drop

Wed Mar 6, 2013 12:38pm EST

By Daniel Bases

NEW YORK, March 6 (Reuters) - Venezuelan debt prices fell on Wednesday as investors, who bid up prices in the months before President Hugo Chavez's death on Tuesday, took advantage of early buying to sell into the rally, knocking benchmark bonds sharply lower.

The country's 2027 sovereign U.S. dollar-denominated Global bonds were bid down 2.10 points in price, lifting their yield to 9.168 percent, according to Reuters data.

"I think there was a lot of buying in anticipation of him dying and now we have hit the event. I'm surprised there hasn't been more selling," said David Spegel, global head of emerging markets strategy at ING Wholesale Banking.

A charismatic firebrand, Chavez created a highly centralized political system, overseeing the widespread nationalization of the country's industries. Investors are hoping that Venezuela moves back toward market-oriented economic policies and away from Chavez's socialist "Bolivarian revolution."

On June 30, 2011, when Chavez announced that he had cancer, yields on the 2027 bonds were hovering above 13 percent. They hit a low of 8.6 percent a month ago.

Bonds of state-run oil company Petroleos de Venezuela SA (PDVSA) also fell on Wednesday.

"The market initially came in and tried to push higher but this was met with a lot of selling. Since then we have had some tentative inquiry from accounts looking to do some buying on weakness," said Siobhan Morden, emerging market debt strategist at Jeffries & Co in New York.

"I would have thought we would have tested higher, but it is just so lopsided in terms of a crowded long position," she said.

Given that yields on Venezuelan debt are significantly higher than most everywhere else in the world and its oil-backed economy provides a steady flow of cash despite heavy social spending, Venezuelan debt overall has been one of the better performing credits.

So far this year, Venezuela's U.S. dollar-denominated sovereign bonds have returned 4.2 percent, according to the JPMorgan Emerging Markets Bond Index Plus (EMBI+). Last year, the Venezuelan debt returned over 46 percent to investors, nearly three times better than the overall index.

PDVSA 2017 bonds were bid down 1.5 points in price, pushing the yields up to 9.49 percent in midday New York trade.

Chavez became a hero to Venezuela's poor by providing subsidized food and free health clinics, paid for with revenue from oil sales.

"We have been overweight (Venezuelan bonds) all along as we always considered that even though there were fiscal excesses, the reality is Venezuela remains a powerhouse in oil production," said Greg Saichin head of emerging markets portfolio management at Pioneer Investments in London.

"Despite anti U.S. rhetoric, the new government will have to mend its relations with the U.S. and that will be good for oil industry and PDVSA," he said, adding: "We prefer PDVSA because that has offshore assets which safeguards a bit in terms of credit risk. Venezuela may have the privilege to default but PDVSA does not."

Chavez's death does leave the OPEC nation's future on an uncertain path, prompting some investors to buy more protection against defaults or restructurings of their Venezuelan debt. Prices on credit default swaps jumped to $662,000 annually for five years, up from $638,000 on Tuesday, according to data provider Markit.

Venezuela is the world's eleventh biggest crude exporter, a top-four supplier to the United States and an increasingly important fuel source for China. In 2011, OPEC said the nation had overtaken Saudi Arabia as the country with the world's biggest crude reserves.

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