Venezuelan government bonds were raised to the equivalent of buy at Bank of America Corp. as President Hugo Chavez sought more cancer treatment in Cuba, spurring speculation that the government may change.
Bond yields were at a four-year low as Chavez arrived in Havana four months after saying he was “totally free” of cancer. The president’s illness raises the prospects of a new regime that may end policies such as nationalizations and currency controls, Francisco Rodriguez, a Bank of America economist, wrote in a note to clients. He also said bonds would benefit from a currency devaluation and reduced issuance.
“There is the risk that government paralysis resulting from his absence could delay the adoption of an exchange-rate adjustment, but this is partly offset by the likely positive reaction that the market would have if Chavez were to step down due to a deterioration of his health,” Rodriguez wrote.
Yields on Venezuela’s dollar bonds maturing in 2027 dropped three basis points, or 0.03 percentage point, to 10.10 percent at 4:22 p.m. in Caracas, the lowest level on a closing basis since July 2008, according to data compiled by Bloomberg. The yields fell 34 basis points yesterday.
The government has reduced inflation-adjusted spending by 13 percent in the seven weeks since Chavez defeated opposition challenger Henrique Capriles Radonski by more than 10 percentage points, Rodriguez said.
“A front-loaded, significant devaluation, which we expect in early 2013, would be very credit-positive, especially” for the shortest-maturity bonds, he wrote. “The spending cuts taking place now will result in little external debt issuance.”