Investors sniffing round as Venezuela debt sinks

Tue Feb 18, 2014 5:35pm EST

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NEW YORK, Feb 18 - Some investors are finding the sharp sell-off in Venezuelan bonds too tempting to resist, as traders noted some support Tuesday for the oil-rich country's bonds despite another one point dip in prices across the sovereign curve in the wake of violent street protests over the weekend.

With the October 2014 bonds trading at around 20%, the market appears to be pricing in a strong possibility of default. Investors are primarily focused on the fiscal impact of an overvalued currency and the perceived mismanagement of a new FX system to distribute scarce US dollars.

But some accounts have been congregating at the short end of the curve, betting that Venezuela is unlikely to default anytime soon.

"The 2014s are trading at 20%," said one US-based trader. "20% for eight-month paper is ridiculous. The government might have to devalue, but they will not default. The 2014s were the first bonds that got bought this morning. You don't see that kind of risk reward every day."

A devaluation would ease some pressures, but the resulting inflationary impact has given the government pause for thought at a time when it faces considerable social unrest, analysts say.

"They have lots of reserves," a New York-based trader said. "All they have to do is show some flexibility on the exchange rate and the money goes as far as the eye can see. But they haven't done that, and the government has lost credibility."

Deadly clashes between pro-government and opposition supporters have added to concerns about the country's deteriorating economic climate, leaving bond prices reeling in recent days. The arrest of opposition leader Leopoldo Lopez could spur more street protests in coming days, Reuters reported today, creating deeper uncertainty over the political risks involved in holding sovereign debt.

"The bonds are down about 1pt today," said the New York trader. "There is very little activity but there are fears about political unrest and that they may not pay [their debt]. So it is a vicious circle."

Venezuela's 2022s closed the day at 77.75-78.50, falling a good point since Friday, while 8.5% 2017s issued by the state-owned oil company ended at a wide bid-offer of 73.00-73.75 after trading around 75.50 Friday.

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