Fixed Income  

T Rowe Price’s gamble on Venezuelan bonds pays off

T Rowe Price’s gamble on Venezuelan bonds pays off

A massive rally in risky Venezuelan government bonds has provided a boost to T Rowe Price’s emerging markets debt team.

The plummeting oil price had pushed Venezuela, a country heavily reliant on the commodity, to the brink of default earlier this year.

However, opportunistic purchases from T Rowe Price have paid off, as a reversal in the oil price and supportive government policies have seen the bonds rally in recent months.

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Jeff Kalinowski, emerging markets debt portfolio specialist at T Rowe Price, said a short-dated bond, maturing in October 2015, from state-owned oil producer Petróleos de Venezuela (PDVSA) had a yield of 54 per cent in early January.

At such a yield, the bond had been “pricing in imminent default”.

However, Mr Kalinowski said the recent rally, driven by “increases in oil prices, supportive technical factors due to low investor positioning, and the government identifying incremental sources of liquidity”, meant the bond now yields just 10.5 per cent.

Given the yield moves inversely to the price, the rally has boosted T Rowe Price’s team, which had been selectively buying shorter-dated bonds.

“Our strategy is focused on shorter-maturity bonds issued by PDVSA, as well as lower dollar priced bonds that trade near recovery prices,” said Mr Kalinowski.

“Attractive relative value, combined with our expectations the country will continue to muddle through the short-to-medium term without experiencing a default, leave us defensively positioned but overweight on a cash bond basis.”

T Rowe Price currently has exposure of 3.3 per cent towards Venezuela in its Global Emerging Markets Bond fund, an overweight position of 1.3 percentage points compared to its benchmark, the JPMorgan Emerging Markets Bond Global Diversified index, according to its latest factsheet.

In spite of the high yields on Venezuelan debt, suggesting markets are still cautious on the prospects of repayment, Mr Kalinowski said he was confident “the Venezuelan government is committed to servicing its debt, and further maintain the pockets of liquidity that are necessary to do so”.

But he acknowledged the country still had a lot of structural challenges and said if the low oil price persisted, it “could struggle to maintain liquidity and solvency past 2017”.

“However, we maintain conviction in the near-term ability of policymakers to successfully avoid default, and recognise compelling value in the country in the interim,” added Mr Kalinowski.

The emerging markets bond market has yet to recover from its massive sell-off in May 2013, when a tightening of US monetary policy caused investors to flee the asset class.

Investors have been hesitant to buy back into the asset class due to concerns about what may happen when the US finally raises its interest rate, which many fear could lead to another sell-off.