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Feb. 13 (Bloomberg) -- Venezuelan bonds rallied after opposition candidate Henrique Capriles Radonski won more than 60 percent of the vote in a nationwide primary, a margin of victory that analysts said could strengthen his bid to unseat President Hugo Chavez in October elections.
The yield on Venezuela’s benchmark 9.25 percent bonds due in 2027 fell 30 basis points, or 0.30 percentage point, to 11.80 percent, the lowest since April 2010, at 3:30 p.m. in New York, according to data compiled by Bloomberg. The bond’s price rose 1.75 cents to 82 cents on the dollar.
Capriles, a 39-year-old governor of Miranda state who promises to gradually unwind Chavez-imposed state controls on the economy, won the South American country’s first presidential primary with 1.8 million votes. The margin of victory and stronger-than-expected voter turnout of almost 3 million people increase the possibility of a “democratic and peaceful transition” in 2013, providing support to Venezuelan assets, Barclays Plc said in a note to clients.
“The global risk rally has helped Venezuelan bonds but the political issue is beginning to be a catalyst that could give them more of a boost,” Alejandro Arreaza, an analyst at Barclays in New York, said in a telephone interview. “Even though Capriles is behind in polls for the presidential election, with this momentum he could close the gap quickly and he emerges as a strong leader of a unified opposition.”
Pablo Perez, who had 30 percent of the vote, and Maria Corina Machado, with about 5 percent of the vote, both announced their support for Capriles after yesterday’s primary.
Chavez, 57, has said that he will win a third-consecutive six-year term in presidential elections on Oct. 7 regardless of who the opposition candidate is. He says that he’s now “cancer free” after having a tumor removed in June and receiving chemotherapy treatment late last year.
The extra yield investors demand to own Venezuelan bonds over U.S. Treasuries narrowed 39 basis points to 1,045 today, the lowest level on a closing basis since May 2010, according to JPMorgan Chase & Co.’s EMBI Global index. That compares to a 30 basis point drop for Argentina and a 12 basis point decline on average in Latin America.
Venezuela has the highest borrowing costs of emerging- market countries in the EMBI Global after Belize and Pakistan.
Bonds of state-run oil company Petroleos de Venezuela SA also surged today. The yield on PDVSA’s 4.9 percent bonds due in 2014 fell 51 basis points to 10.72 percent today, according to data compiled by Bloomberg. The bond’s price rose 1.08 cents to 86.66 cents on the dollar.
“We expect a post-nomination boost in Capriles’ poll numbers, but also expect this boost to be temporary,” Francisco Rodriguez, an economist at Bank of America Corp. in New York, said in a note to clients. “We continue to see a Chavez victory in the October elections as the most likely scenario.”
Nationally, Chavez was leading voter preferences with 47.3 percent support, compared with 44.9 percent for Capriles, according to a December poll by Caracas-based Consultores 21, published by Barclays in a separate note to clients. The report did not specify dates or a margin of error for the survey.
The cost of protecting Venezuelan debt against non-payment for five years with credit-default swaps fell 28 basis points to 794, according to data compiled by CMA in London. 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.
‘Country in Crisis’
While pledging to reverse some of Chavez’s economic policies that have fueled an inflation rate of 26 percent, the highest of 78 countries tracked by Bloomberg, and left the economy dependent on oil-financed fiscal spending, Capriles has said the process would be gradual. He’s cited the more than 70 free health clinics in poor neighborhoods of Miranda and a subsidized food program for low-income families as proof of how he’d continue a more efficient version of Chavez’s social initiatives.
“Our country is in crisis and we have a government that only cares about politics,” Capriles said last night in his victory speech in front of thousands of supporters waving flags and dancing. “We’re going to take this country into the 21st century.”
Capriles has said that he’d temporarily maintain currency controls to avoid a plunge in the bolivar and leave subsidized gasoline prices unchanged.
“The result, although somewhat expected, is still market positive,” Alberto Ramos, an analyst at Goldman Sachs Group Inc., said in a note to clients following yesterday’s vote. “President Chavez will face in October perhaps the most serious challenge to his hitherto solid grip on power, the economy, and the country overall.”
Investors will probably begin to focus on polling data now to gauge Capriles’ momentum in a head-to-head race against Chavez and the president’s public appearances as he recovers from cancer, Alfredo Viegas, managing director of emerging markets at Knight Capital in Greenwich, Connecticut, said in a telephone interview.
“We’re going to phase into poll watching mentality and if it starts to show some significant momentum past the high 40 percent levels, that’s going to galvanize the market more,” Viegas said. “There’s potential for the risk premium to erode significantly, especially where similarly trading emerging market dollar sovereigns are trading.”
--With assistance from Shannon D. Harrington in New York. Editors: David Papadopoulos, Glenn J. Kalinoski
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