U.S. trading of Venezuela bonds stops after sanctions extended; secondary market flat

By Rebecca Melvin

New York, Feb. 4 – Trading of Venezuela’s bonds by U.S. persons came to a halt on Monday after the U.S. Treasury Department extended sanctions to cover the sovereign’s international notes in addition to the bonds of Venezuela’s state-owned oil company, Petroleos de Venezuela SA, which U.S. persons were prohibited from doing business in last week.

The moves come as the United States and other countries step up pressure in an effort to remove Venezuela president Nicolas Maduro from power, asserting that the nation’s 2018 elections in which he was elected to another term last May were illegitimate.

The slow-moving crisis has left market players uncertain of what the future holds. Trading in the bonds of the debt-laden country, which was in default on many issues, had recently picked up in terms of volume and prices amid increasing expectations of regime change.

Elsewhere, the emerging markets debt secondary market was little changed, having completed a strong January, with currencies marking their biggest monthly gain in a year, and the primary market remained hushed. January saw a resurgence of demand in emerging market bonds including the likes of Indonesia, South Africa, India and Brazil, but investor concerns about high debt levels and other uncertainties seemed to keep issuers at bay.

Indonesia is scheduled to hold elections in April, but the government of current president Joko Widodo appears stable so political risk is low. And with the U.S. Federal Reserve taking a more patient approach to rate raises this year, the central bank of Indonesia has more room to cut its rate, market sources say.

South Africa faces political risks with its elections scheduled this year. The country’s current-account deficit isn’t decreasing even though its economic growth rate is low.

There are positive signs around Brazil’s pension reform under the government of president Jair Bolsonaro, and inflationary pressure has subsided while the economy may continue to recover.

In India’s election, a coalition government may be installed as prime minister Narendra Modi’s party is unlikely to get a majority, sources said. But the country’s economic growth rate remains high and inflation is low.

Trends like a tailwind for Brazilian bonds and headwinds for those of Mexico remain in place, but the new restriction on trading of Venezuelan bonds may spark demand for other high yielding emerging market credits that could shift trends, market sources say.

Venezuela ‘black box’

As of Friday, most of Venezuela’s sovereign bonds had been in the low to mid 30s, a New York-based trader said. Pricing had lifted 10% to 15% since Venezuela’s National Assembly president Juan Guaido declared himself interim president of Venezuela on Jan. 23.

But now the same thing that happened to the PDVSA bonds last week has happened to the Venezuela bonds, the trader said. “I have no idea where prices are for Venezuela bonds. It’s like a black box. I would imagine they are lower, but I have no way of knowing.”

How long Venezuela and PDVSA bonds will remain on the Treasury’s restricted list was surmised to “take as much time as Maduro is in power,” and there is no way of knowing whether he will hold on two weeks, two months or two years, the trader said.

Maduro still resides in the Miraflores presidential palace in Caracas, and his government is largely intact. He took over the reins of Hugo Chavez’s Bolivarian Revolution in 2013. But his time in office has been marked by a contracting economy, declining oil production, debt defaults, hyperinflation, food and medicine shortages, increasing disruptions of water and electricity services, and rising crime and murder rates.

“Everything regarded as international, [Guaido] controls as this point. The international community is supporting him. Locally, it’s harder because the army is with Maduro,” the trader said.

On Monday, Poland, Czech Republic and Croatia joined other European countries, including Germany, Spain, France, Sweden, Austria, Denmark and Britain in recognizing Guaido as interim president of Venezuela. But U.N. secretary-general Antonio Guterres said in order to maintain the United Nations’ credibility, it will not join any group of nations promoting initiatives to resolve the crisis in Venezuela.

© 2015 Prospect News.
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