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Venezuela’s dollar bonds have surged more than 50 per cent in price this year as investors bet that pressure on Nicolás Maduro’s government from the Trump administration has increased the likelihood of Caracas one day regaining access to global markets.
The South American country defaulted in 2017 and has been barred from restructuring its debts by US and international sanctions. However, the bonds still trade, in effect allowing investors to buy and sell claims on an eventual debt workout.
Prices have rallied this month to about 25 cents on the dollar, their highest level in more than half a decade, up from 16 cents at the start of the year as Maduro’s grip on power has appeared to weaken.
Venezuelan debt is “pricing a higher optionality that ‘something’ could happen in Caracas”, one bondholder said, referring to the possibility of Maduro being forced out.
In recent weeks the US has sunk at least five alleged Venezuelan drug smuggling boats, killing at least 27 people, after deploying eight warships and thousands of troops to the Caribbean from late August, alongside 10 F-35 jets sent to Puerto Rico.
Maduro has said the deployment, which far exceeds the force needed to destroy speedboats, is aimed at securing his overthrow — something that Trump has denied.
“Of course there is a chance that [Donald] Trump could be bluffing,” the bondholder said, “but it seems to me that [US secretary of state Marco] Rubio has convinced the president to play hardball. We investors are all sick of the status quo in Venezuela.”
Trump has also cut off a diplomatic back channel to Maduro’s government, which has long lacked the authority to conduct a restructuring of the debt.
Investors said an acceleration of the rally over the past month also reflected an onrush of cash chasing a general rally in emerging market assets this year, as much as the US targeting Maduro as the alleged leader of a “narco-terrorist” cartel.
“Venezuela has gone from deep freeze, to people asking why it keeps going up and being forced to get involved,” said Edward Cowen, chief executive of Winterbrook Capital, a London-based specialist asset manager that advises and manages more than $130mn in Venezuelan assets.
Venezuela’s enormous potential for increased oil production — it has the world’s largest proven reserves — is one reason investors believe that eventual recovery on the bonds will be much higher than current prices, even though oil output is in a parlous state because of sanctions, mismanagement and decay.
Distressed debts of Petróleos de Venezuela, the state-owned oil company, have joined the rally, with a bond due in 2035, for example, rising from 11 to about 19 cents on the dollar.
Prices for the bonds “could climb further as the Trump administration continues to ratchet up pressure toward an outcome that remains — quite deliberately — undefined”, said Daniel Lansberg-Rodriguez, director at Aurora Macro Strategies.
Venezuelan debts have also benefited from their inclusion in a widely followed JPMorgan index of emerging market dollar bonds. The index has risen almost 11 per cent this year.
“The general direction of travel in the market does matter,” Cowen said. “Emerging market outflows have become inflows — every month, more and more funds are looking to build a position in Venezuelan bonds.”
In 2019, US sanctions triggered the removal of the bonds from the JPMorgan index, “forcing a large number of holders to sell positions, moving prices lower to the mid-teens and ultimately high single digits”, Cowen said. “It became a clearing market where pricing became almost irrelevant.”
At one point Winterbrook, as a non-US entity, was one of only four funds that could lawfully buy Venezuelan bonds, Cowen added. The number of funds rose to 50 after the US lifted sanctions on trading of the bonds, which were eventually allowed back into the index last year.
The number of funds trading Venezuelan bonds “is probably above 400 today and increasing every month”, Cowen said.
Additional reporting by Joe Daniels in Bogotá