Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Don’t be fooled by the rebound in Venezuelan bonds
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Venezuelan bonds have rallied along with risk sentiment in early 2019, and the US' recognition of Juan Guaido as interim president has boosted them further still. The risks remain high, however, as Maduro is still in power and the situation remains unresolved.
This year is shaping up to be one of surprises. Not only have we witnessed an extraordinary recovery in equities after one of the worst Decembers in decades, but the world’s political equilibrium is shaking and major changes are on the horizon. Nobody can reasonably predict the outcome of the Sino-US trade talks, but while investors are left to ponder the risks and opportunities that may arise on that front, another political shift appears primed to offer its own suite of opportunities.
We are talking about Venezuela, where last week saw the US recognise Juan Guaidó as interim president. Venezuelan assets have spiked to new highs on the move, signaling that we might get a definitive solution regarding the country’s longstanding malaise.
Since January 1, the Venezuelan government’s international bonds have rallied from a cash price of 23 to the current level of 32. The rally started long before embattled leader Nicolás Maduro’s opposition started to gain steam, and probably came down to the recovery in risk sentiment seen in the wake of Federal Reserve chair Jerome Powell’s dovish January 4 speech.
We are talking about Venezuela, where last week saw the US recognise Juan Guaidó as interim president. Venezuelan assets have spiked to new highs on the move, signaling that we might get a definitive solution regarding the country’s longstanding malaise.
Since January 1, the Venezuelan government’s international bonds have rallied from a cash price of 23 to the current level of 32. The rally started long before embattled leader Nicolás Maduro’s opposition started to gain steam, and probably came down to the recovery in risk sentiment seen in the wake of Federal Reserve chair Jerome Powell’s dovish January 4 speech.
The rebound seen in PDVSA defaulted bonds with a February 2022 maturity has also been impressive with the price bouncing more than 20 points since January 1. The market tends to be more bullish on PDVSA bonds as compared to Venezuelan sovereigns because Guaidó has already put forward concrete plans for the oil company. The interim president is looking to replace board members of Citgo Petroleum, a Houston-based refiner owned by PDVSA.
Guaidó has also said that the oil minister and president of the company, Manuel Quevedo, will be dismissed.
The rally in this name seemed destined to be short-lived when US Senator Marco Rubio announced sanctions on PDVSA to put more pressure on Maduro. The sanctions will forbid US citizens from buying PDVSA bonds in the secondary market, leaving them with no other option beyond selling their holdings to foreign buyers.
This will considerably decrease liquidity. We haven’t witnessed a full-scale sell-off in this name, however, because investors are waiting on further word from the government. Once conditions are clarified, we can expect the sell-off to be severe, particularly in bonds that have already defaulted, such as the ones with coupon 12.75% and maturity February 2022 (USP7807HAM71).
This shows how dangerous it is speculate in such a delicate environment.
Guaidó has also said that the oil minister and president of the company, Manuel Quevedo, will be dismissed.
The rally in this name seemed destined to be short-lived when US Senator Marco Rubio announced sanctions on PDVSA to put more pressure on Maduro. The sanctions will forbid US citizens from buying PDVSA bonds in the secondary market, leaving them with no other option beyond selling their holdings to foreign buyers.
This will considerably decrease liquidity. We haven’t witnessed a full-scale sell-off in this name, however, because investors are waiting on further word from the government. Once conditions are clarified, we can expect the sell-off to be severe, particularly in bonds that have already defaulted, such as the ones with coupon 12.75% and maturity February 2022 (USP7807HAM71).
This shows how dangerous it is speculate in such a delicate environment.
The market might be a little bit overconfident as well. First, recognising an interim president doesn’t mean that Maduro will step down without a fight. Maduro still holds power and enjoys a degree of international support from his own allies, meaning that he may take extreme measures to remain in charge. Second, the US’ recognition of Guaidó as interim president ignites old disagreements that may endanger the trade talks under way between the US and China.
The international community is once again split. Guaidó is backed by the US, Canada, continental Europe, and many of Venezuela’s neighbors such as Brazil, Colombia and Argentina. Maduro is backed by Russia, North Korea, Cuba and Bolivia. One notable power maintaining a neutral stance is China, but Beijing has been vocal in the past about opposing foreign interference in the region leading many to believe that it indirectly supports Maduro.
The situation in Venezuela is far from resolved and we are not sure that this week’s moves represent the beginning of a liberalisation movement or whether they will strengthen the resolve of the current regime. What is certain is that this situation is placing more pressure to the already fragile international order that investors so rely on.
From this perspective, the rally that we have seen in Venezuelan government bonds is not justified, as the path towards liberalisation is yet not clear and it will take time before we know whether if policy normalisation will be supportive of Venezuelan bonds’ recovery.
In the meantime, the Venezuelan circumstance threatens emerging markets, which find themselves closely tied to both the international political environment and the economic slowdown. An intensification of rhetoric between the global East and West, whether it’s due to Venezuela or trade, would certainly place EMs in jeopardy post- their recent rally.
The most vulnerable region will be APAC due to its proximity to, and reliance upon, China; the second-most exposed region is Latin America, where national leaders are already dividing in light of the Venezuela turmoil.
This is why we believe that investors should consider taking advantage of EMs’ present high valuations in order to take profits and flee to safer assets. Investing in safer assets doesn’t mean being yield-deprived, though. As we have previously noted, interesting opportunities are available in more developed regions of the world.
The international community is once again split. Guaidó is backed by the US, Canada, continental Europe, and many of Venezuela’s neighbors such as Brazil, Colombia and Argentina. Maduro is backed by Russia, North Korea, Cuba and Bolivia. One notable power maintaining a neutral stance is China, but Beijing has been vocal in the past about opposing foreign interference in the region leading many to believe that it indirectly supports Maduro.
The situation in Venezuela is far from resolved and we are not sure that this week’s moves represent the beginning of a liberalisation movement or whether they will strengthen the resolve of the current regime. What is certain is that this situation is placing more pressure to the already fragile international order that investors so rely on.
From this perspective, the rally that we have seen in Venezuelan government bonds is not justified, as the path towards liberalisation is yet not clear and it will take time before we know whether if policy normalisation will be supportive of Venezuelan bonds’ recovery.
In the meantime, the Venezuelan circumstance threatens emerging markets, which find themselves closely tied to both the international political environment and the economic slowdown. An intensification of rhetoric between the global East and West, whether it’s due to Venezuela or trade, would certainly place EMs in jeopardy post- their recent rally.
The most vulnerable region will be APAC due to its proximity to, and reliance upon, China; the second-most exposed region is Latin America, where national leaders are already dividing in light of the Venezuela turmoil.
This is why we believe that investors should consider taking advantage of EMs’ present high valuations in order to take profits and flee to safer assets. Investing in safer assets doesn’t mean being yield-deprived, though. As we have previously noted, interesting opportunities are available in more developed regions of the world.
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