Venezuelan President Hugo Chávez, died on Tuesday at the age of 58 after losing his battle with cancer. As the country begins seven days of public mourning, Raphael Kassin, Citywire columist and a long-time champion of Venezuelan bonds, dissects the potential political fallout and the impact on bonds prices.
Venezuelan foreign currency bonds have provided investors with a high carry for at least a decade.
Over the last few years, investors and researchers started to warm up to the idea that the country holds significant oil reserves and prices tended to climb in step fashion partly as a result of that realization.
During all these years, Hugo Chávez was healthy in power, providing Venezuelans with his own popular (and populist) style of socialist fairness and bringing us controversial, charismatic and generally pragmatic statements about global political shenanigans.
His comments sometimes brought volatility to bond prices, often more than was deserved.
Most recently, investors began to sniff the possibility of Chávez ending his term either voluntarily or due to worsening health conditions and bonds in the long end crossed below the 9% yield mark as a result.
In my humble opinion, there was never a question about the country's bonds being too cheap due to economic fundamentals and I welcomed the price appreciation.
From a political point of view, I have also been comfortable with El Comandante's style of management. Why? Because if he were to default, he would have done it early in his career.
But he never did. So, for a bond investor, that's what I found important to know. Now, I consider 9% still a high yield for a country with Venezuela's economic potential and I maintain the view that yields will continue to decline.
What will Hugo Chávez's passing away mean for bond prices/yields?
There might be a knee-jerk reaction to the news and prices may spike up on Wednesday. But that would be short-lived, as it is important for investors to see a clear path ahead.
If politicians' activity towards finding a proper successor happens peacefully and the country remains stable, investors can reasonably expect bond levels to remain stable too.
It is still early to predict who will be Chávez's successor and I would argue the end result is irrelevant (though I have a hunch, but tend not to reveal my crystal ball predictions this early in the game).
What matters is that the succession process happens democratically and peacefully. If that happens, bond yields can then resume their decline to at least 7% yield levels.
Raphael Kassin runs the consultancy firm Mirage Capital and advises on emerging market debt investment.