March 6, 2013 / 3:51 PM / in 5 years

Venezuelan bonds fall up to 3 pts as investors trim exposure

March 6 (IFR) - Venezuela bonds slid up to 3 points on Wednesday after investors decided to take profits and reduce exposure to the oil-rich country after the announcement of Hugo Chavez’s death yesterday afternoon.

The uncertainty over Venezuela’s short-term political future has left investors preferring to sell and lock in gains after what has been a decent run-up in the bonds since news of Chavez’s ill health inspired hopes of regime change among the investment community.

“It is a crowded trade and everything has been priced in already,” said a New York-based trader.

Venezuela bonds rallied several points Tuesday on news of the president’s deteriorating health, only to drop during a speech yesterday by vice-president and Chavez’s hand-picked successor Nicolas Maduro. That speech included an announcement that the government planned to expel a US embassy official.

“He was really aggressive. It is the same stuff but without Chavez,” said one trader, who noted that buying before the speech soon reversed and sent prices lower.

Venezuela 2022s were last quoted at a wide bid/offer spread of 118.25-119.50 after closing at 119.625. Meanwhile the 2022s issued by state-owned oil company PDVSA were trading at 114.50-115.00 after reaching a high on Tuesday of 118.00.

Analysts are expecting more volatile trading in coming days as investors sell on strength and wait for opportunities to re-enter at cheaper levels.

“We saw some buyers really early in the New York open but since then it is sellers, sellers,” said Rodrigo Covian, a trader at Bulltick in Miami. “There is some upside in the future, but not in the short term.”

Moody’s has already revised its outlook to negative on Venezuela’s B2 foreign currency government bond rating, citing political risks and uncertainty over its ability to turn around the economy which has seen a marked deterioration.

Increased government spending in the wake of last year’s presidential elections has pushed the fiscal deficit higher and left the government “highly overextended,” the agency said.

“With Chavez’ successor, whoever he may be, likely to face significant challenges to his authority, Moody’s believes it will be difficult for him to make the economic policy adjustments necessary to address these growing imbalances,” the agency said.

The government is expected to call elections over the next 30 days as required by the constitution. A quick election should work to the incumbent’s advantage as Maduro should be able to benefit from sympathy votes in the wake of Chavez’s death.

Some analysts are already looking beyond what they assume to be a Maduro victory at how such a government will direct economic policy.

Maduro’s aggressive rhetoric on Tuesday, according to Siobhan Morden, head of Latin America strategy at Jefferies, challenges the widespread view that the transition will move toward “Chavismo light.”

“On balance the headlines may now shift to more two-sided risks with potential disappointment on a Maduro victory and the still radical policy bias,” she wrote.

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