Venezuela Bonds Extend Drop After US Threatens to Renew Sanctions

(Bloomberg) -- Venezuelan bonds extended their worse selloff since the onset of the pandemic after the US warned sanctions will be restored if the government continues to block opposition candidates from running in this year’s elections.

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Government notes due in 2027 sliding 2.2 cents on the dollar to 19.2 cents, the biggest drop since March 2020, according to traders and indicative price data compiled by Bloomberg. Bonds of the state oil company Petroleos de Venezuela SA, or PDVSA, due in 2026 also dropped one cent.

US officials said on Monday that the Biden administration would reimpose oil sanctions on Venezuela after a six-month suspension expires in April if the government upholds last week’s ban against opposition front-runner María Corina Machado. The State Department had said over the weekend that President Nicolas Maduro’s backsliding on his promise of open elections would prompt a review.

For investors who had been piling into the debt as Maduro government started to regain its footing with Washington, it couldn’t have come at a worse time. JPMorgan Chase & CO. was set to decide by Jan. 31 whether to increase the country’s weighting in indexes that are widely followed by money managers to make investment decisions. The weighting is currently zero.

There’s a possibility that the sanctions risk will affect JPMorgan’s decision, said Francesco Marani, head of trading at Madrid-based boutique investment firm Auriga Global Investors.

Bonds sold by the government and PDVSA have been in default since 2017. But investors had been buying up the debt ever since the Biden administration eased several sanctions last year, including lifting a US ban on trading in the secondary market.

Marani said he sees “a very low probability of reimposing the trading ban.”

If JPMorgan decides to increase Venezuela’s weighting, it may lead to as much as $1.5 billion in market value demand for the bonds, Simon Waever, Morgan Stanley’s global head of EM credit strategy wrote in a November note.

The sanctions review increases the chances that JPMorgan will postpone the decision by kicking back the assessment period, said Carlos de Sousa, an investor at Vontobel Asset Management in Zurich.

--With assistance from Philip Sanders.

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