Venezuela bonds are the hottest trade on Wall Street this week, but risks remain

Venezuela’s long-defaulted bonds are suddenly one of the hottest trades in emerging markets.

Prices on the country’s benchmark notes due in October 2026 have surged to about 43 cents on the dollar, more than doubling since August. The rally comes as traders reassess recovery prospects on the distressed securities following the surprise removal of President Nicolas Maduro and a shift in U.S. policy that has opened the door to a potential restructuring of the nation’s debt.

Investors are betting that a faster-than-expected political transition along with a clearer path to asset recovery could unlock value that has been frozen for nearly a decade. Venezuela fell into default in late 2017 after failing to make payments on overseas bonds issued by both the government and its state-owned oil producer PDVSA. Fidelity Investments and T. Rowe Price are among the holders that own significant amounts of these defaulted bonds, according to reports.

Donato Guarino, an emerging-market strategist at Citi, said uncertainties remain particularly given lingering questions about the new government’s political alignment with Washington.

“To the Trump administration, it’s key to extract the oil reserves the Venezuela has at the moment. That means that the GDP of Venezuela will go higher. That means that the ability to pay bondholders will be higher,” Guarino told CNBC. “However, in the short term, you may see some risks because what Trump did is a big gamble… there is a question of loyalty of the current new president towards Trump.”

Trump has, in recent days, said the U.S. would “run” Venezuela, threatened Colombia and Cuba and renewed his push to acquire Greenland. Those remarks followed a weekend military strike that captured Maduro from Caracas and whisked him to the U.S. to face criminal charges without prior congressional authorization. 

Barclays upgraded Venezuela bonds to market weight after rapidly unfolding political developments altered its outlook.

The Wall Street firm also cautioned that the scale and complexity of Venezuela’s debt overhang could cap upside from here. Venezuela and PDVSA together have $56.5 billion of unsecured eurobonds outstanding, Barclays said. Including past-due interest, total bondholder claims rise to $98.3 billion, or roughly 119% of GDP, based on the IMF’s 2025 GDP projection.

The bank said recovery values could vary widely, noting that Venezuela’s economy is now about 30% smaller and oil production has nearly halved over the past eight years. As a result, ultimate recoveries will depend heavily on how quickly the economy and oil sector can rebound in the years ahead.

Jeffrey Sherman, deputy chief investment officer at DoubleLine, believes the rally may be running ahead of reality.

“There’s still a lot of risks there. you have this kind of continuation right now of the leadership there,” Sherman said Tuesday on CNBC’s “Money Movers.” “We’ll see how that transitions are talking about elections and things. So again, I think it’s way too early to get too excited about that, especially as a debt investor.”

The recent developments in Venezuela could also prove a major win for Elliott Investment Management, the firm founded by billionaire investor Paul Singer. Less than two months ago, the investor, known for striking lucrative deals in high-risk markets, won U.S. approval for a $6 billion bid for Citgo Petroleum, the refining firm owned by state-run PDVSA.

— With assistance from Gina Francolla