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BofA Says Chavez Defeat Bets Are Overdone in Bond Market

Bank of America Corp. recommended selling Venezuelan bonds, saying that their rally shows investors are overestimating the chances that President Hugo Chavez will lose this month’s election.

Bank of America cut Venezuelan bonds to underweight two weeks after JPMorgan Chase & Co. lowered the country’s debt to marketweight from overweight. Bank of America told clients to sell dollar bonds due in 2028 and 2034, saying they’ve become expensive. Yields on the bonds due 2028 have plunged 2.25 percentage points since the end of June to 10.62 percent and touched a four-year low of 10.54 percent yesterday.

Chavez is likely to defeat opposition candidate Henrique Capriles Radonski in the Oct. 7 vote and could win by a wide enough margin to give him room to pursue “more radical policies,” Bank of America analysts led by Jane Brauer wrote in a report. Chavez’s nationalizations of utilities, banks and other companies as well as his implementation of currency and price controls have helped make Venezuelan bonds the highest- yielding securities among major Latin American countries.

“We see many investors holding overweight or market weight positions going into the election, believing that the upside is very large if Capriles wins and that the downside is manageable if Chavez wins,” the analysts wrote. “A selloff could occur if President Chavez wins re-election by a wide margin.”

Poll Results

Polls ahead of the vote have varied. A Datanalisis poll from Aug. 25 through Sept. 5 of 1,600 people who said they’re certain to vote showed Chavez led Capriles by 10.4 percentage points. A Consultores 21 poll of 1,500 people taken from Sept. 7-18 showed the two candidates in a statistical tie, with Capriles supported by 46.5 percent and Chavez by 45.7 percent.

Bank of America said its “central scenario” is Chavez winning by between seven to 10 percentage points.

JPMorgan Chase cut Venezuelan bonds on Sept. 17, saying that the securities were “adequately” priced after the rally.

The extra yield investors demand to own Venezuelan government dollar debt over U.S. Treasuries rose 17 basis points to 951 basis points at 12:38 p.m. New York time, according to JPMorgan’s EMBIG index.

To contact the reporter on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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