Jeff Kalinowski, emerging markets debt specialist at T. Rowe Price, comments on Venezuelan bond surge.
“Markets had been pricing in an imminent default in Venezuela at the beginning of this year, underpinning large yields on even short-maturity bonds.
“For example, bonds from state-owned oil producer Petróleos de Venezuela (PDVSA) maturing in October 2015 offered a 54%* yield in early January.
“More recently, Venezuela has rallied amid an increase in oil prices, supportive technical factors due to low investor positioning, and the government identifying incremental sources of liquidity. The PDVSA 2015 bond yields have compressed to 10.48%*.
“Attractive relative value, combined with our expectations the country will continue to muddle through the short-to-medium term without experiencing a default, leave us defensively positioned, but overweight on a cash bond basis.
“Our strategy is focused on shorter-maturity bonds issued by PDVSA, as well as lower dollar priced bonds that trade near recovery prices.
“We remain of the view the Venezuelan government is committed to servicing its debt, and further maintain the pockets of liquidity that are necessary to do so.
“Venezuela still holds valuable assets that it can sell, such as the American oil refiner Citgo, and officials maintain a high willingness to service debt in order to preserve capital markets access that supports PDVSA’s capex needs.
“Moreover, the oil company is Venezuela’s primary means of US dollar generation and if it were to default, international creditors would likely seize assets located abroad.
“Longer-term, the country still faces a number of structural challenges and without higher oil prices could struggle to maintain liquidity and solvency past 2017.
“These challenges include high fiscal deficits, an overvalued exchange rate, elevated inflation, and poorly functioning democratic institutions.
“However, we maintain conviction in the near-term ability of policymakers to successfully avoid default, and recognise compelling value in the country in the interim.”
* Source: Bloomberg, 19 May 2015