Venezuela Bonds Tumble to Five-Year Low After Crude Oil Drop

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Venezuelan bonds fell to a five-year low as traders projected higher chances of default after OPEC’s decision to maintain oil output pushed crude lower.

The South American nation’s benchmark notes due in 2027 fell 5.5 cents on the dollar to 51 cents at 1:58 p.m. in New York, the lowest level since February 2009. The extra yield investors demand to own Venezuelan debt instead of U.S. Treasuries surged 2.14 percentage points to 20.51 percentage points, according to JPMorgan Chase & Co. data.

Investors are pulling money out of Venezuela as the rout in oil raises the risk that the nation won’t be able to pay for its imports. West Texas Intermediate climbed after earlier today dropping to below $65 a barrel, the lowest level since July 2009. Crude tumbled last week on speculation prices have further to drop before the Organization of Petroleum Exporting Countries decision to maintain output slows U.S. shale supply.

“Every $1 drop in oil is around $770 million of lost revenue, so their ability to pay has taken a big hit,” Kevin Daly, a money manager at Aberdeen Asset Management, said in an e-mailed response to questions. “The market is already pricing in a high probability of default next year.”

Bank of America Corp. lowered its recommendation on Venezuelan bonds today to marketweight from overweight, citing the OPEC decision. At current oil prices, Venezuela will need an additional $25.6 billion to finance imports, the bank said.

Default Swaps

The upfront cost to buy protection against a Venezuelan default over the next five years with credit-default swaps jumped 6.23 percentage points today to 49.51 percentage points, the highest in the world, according to CMA data.

“Investors will continue to respond to what they see,” Jane Brauer, a Bank of America strategist, wrote in a report today. “The Venezuelan government has not been very responsive, not acting fast enough to adjust, and not calming the markets with executable plans to respond to these external pressures.”

Venezuela can overcome any situation arising from lower oil prices and is taking measures to protect itself amid the drop, Rafael Ramirez, the nation’s foreign minister, said in an interview published in the newspaper Panorama.

Venezuela needs a break-even price near $85 a barrel with adjustments to pay for its dollar liabilities, Jefferies Group LLC analyst Siobhan Morden said in a research note.

Notes maturing in 2024 from Ecuador, OPEC’s smallest producing member, fell 4.3 cents on the dollar to 98.20, the lowest since they were issued in June.

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