Bloomberg News

Venezuela Bonds Rally on Speculation Chavez Health Worsening

September 29, 2011

(Adds comments from Chavez in sixth paragraph.)

Sept. 29 (Bloomberg) -- Venezuelan bonds rallied the most in seven weeks on speculation President Hugo Chavez’s health is deteriorating and will prevent him from running for re-election, paving the way for a reversal of policies that have fueled the fastest inflation in the Americas.

Yields on the benchmark 9.25 percent dollar bonds maturing in 2027 fell 33 basis points, or 0.33 percentage point, to 15.44 percent at 4:40 p.m. New York time, according to data compiled by Bloomberg. El Nuevo Herald reported last night that Chavez would undergo dialysis to treat possible kidney failure. Chavez, who revealed in June that he was battling cancer, appeared live on state television today to dismiss the Herald report as “rumors.”

Chavez has nationalized parts of the oil, metals, cement and utilities industries since taking office in 1999 while imposing currency and price controls in a bid to contain annual inflation that has surged to 26.5 percent. Venezuela has the second-highest overseas borrowing costs among emerging-market countries after Belarus, according to JPMorgan Chase & Co.

“The market’s reacting to the news that this could be the end of his regime,” said Kathryn Rooney Vera, an emerging markets analyst at Bulltick Capital Markets in Miami. “Anything is better than Chavez, but the transition from the Chavista regime to anything else will be tumultuous.”

Yields Tumble

After refuting the Herald report by phone on state television earlier today, Chavez appeared live to say his kidneys aren’t affected by the cancer.

“I am my own answer and the life I will live from now on will be the response - the President Chavez who’s coming in 2012, 2013, 2019,” he said.

The yield on Venezuela’s benchmark bonds tumbled 117 basis points in the month following the announcement that Chavez had undergone surgery in Cuba. He reiterated today in the phone interview on state TV his plans to run for a new six-year term in next year’s elections, saying he’s “itching” to start campaigning.

“I’m asking the Venezuelan people not to pay attention to rumors,” Chavez said in the interview. “I would be the first of all Venezuelans to come out and communicate any difficulty.”

The 57-year-old former paratrooper had a baseball-sized tumor removed in June. Since then, he has provided few details about the state of his health, including the form of cancer he’s fighting.

Default Swaps

The extra yield investors demand to own Venezuelan government debt instead of U.S. Treasuries plunged 58 basis points to 1,425 today.

The cost of protecting Venezuelan bonds against default for five years fell 35 basis points to 1,219, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

“There’s a lot of distrust surrounding his comments about his health,” said Aryam Vazquez, an emerging-markets economist at Wells Fargo & Co. in New York. “His situation does not look good and bonds will rally on the fact he may be eliminated from the picture and not be there for elections.”

--Editors: David Papadopoulos, Marie-France Han

To contact the reporters on this story: Boris Korby in New York at bkorby1@bloomberg.net; Charlie Devereux in Caracas at cdevereux3@bloomberg.net.

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


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