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* Debt insurance costs tumble for Venezuela
* President Hugo Chavez goes to Cuba for cancer surgery
By Sujata Rao and Daniel Bases
LONDON/NEW YORK, Dec 10 (Reuters) - Venezuelan dollar bonds rallied sharply on Monday and debt insurance costs tumbled after the nomination of a successor by ailing President Hugo Chavez raised the prospect of his departure after 14 years in power.
Chavez stunned Venezuela over the weekend with an announcement that he had suffered a setback in his long-term battle with cancer. He named Vice President and Foreign Minister Nicolas Maduro to take over, should he become incapacitated.
Venezuelan yield spreads over U.S. Treasuries fell 60 basis points to 753 bps, the narrowest since August 2008, on JP Morgan's EMBI Global index. Total returns on Venezuelan credit, according to the EMBI Global, are up 3 percent for the day.
The 2027 dollar bond, the most actively traded, rose 2.25 cents to bid 101, its highest point since February 2008. The yield is at 9.122 percent.
Since Chavez's cancer was revealed in mid-2011, emerging market investors have grappled with potential outcomes, including one where a dominant Chavez no longer calls the shots.
What remains even with a potential successor named, says Paul DeNoon, a veteran emerging markets fixed income analyst at AllianceBernstein in New York, is the fact that there are too many moving parts in the story to know the ultimate outcome.
"There's probably as much uncertainty today as there was Friday. The good news is that at least we have some idea who Chavez has named to step in, but the big question mark is whether other Chavistas will support the passing of the mantle to Maduro," said DeNoon.
Chavez pumped his fist in the air early Monday morning as he boarded a flight for Cuba, where he will undergo surgery. Chavez said he hoped to return soon.
Investors increasingly bid up the prices on the OPEC nation's debt as New York trading activity moved into full swing.
The cost to insure against a potential default or restructuring of Venezuelan debt declined. The price on five-year credit default swaps fell to 592 basis points from the Friday close of around 645 bps, according to Markit data. They are down around 150 bps since the end of November, when Chavez first returned to Cuba for treatment.
Investors remain attracted to the high yields on Venezuelan sovereign bonds, which typically offer current returns in the 8.5 percent to 9.5 percent range versus super-safe U.S. Treasury yields offering 1.6 percent on a benchmark 10-year note.
Chavez, for all of his socialist policies and fiery anti-American rhetoric, continues to pay his lenders from the proceeds of the nation's oil wealth.
Markets expect that if a new election were needed, the opposition, led by pro-business Henrique Capriles, could be in its best position to win since Chavez took power in 1999.
Chavez was re-elected earlier this year, beating Capriles, despite his ill health.
Stuart Culverhouse, head of research at Exotix brokerage in London, s aid that if Chavez were to leave office, it would not necessarily lead to a change of government. He said the longer-term risk was one of political instability as a transition is made from Chavez's highly centralized rule.
"We'll see a near-term rally while the news is digested, but it doesn't mean it's going to last," Culverhouse said.
Venezuela's oil wealth is the pillar of Chavez's socialist economic policies that led to him nationalizing the energy sector and other major swaths of the economy. Venezuela continues to issue and service large amounts of debt, despite stagnating production and exports from state-run oil company PDVSA.
DeNoon said that while emerging markets have a strong tone that will likely allow Venezuelan debt to trade "fairly well," nobody should be surprised if there are setbacks.
"I don't think anything will impact (the ability and capacity) to pay over the near-term, but there have been significant amounts of damage done to the economy," DeNoon said. "The stress points are weaning the country off of a significant amount of state intervention and creating a functioning economic model."