Venny bondholders are jolly after state-owned PDVSA pulled off a relatively smooth maturity of its USD 2.1 bond due in April 12th. Sure, there was a last-minute selloff and an emergency repo to save the day, but then you wouldn’t be investing in assets like these if you didn’t have a stomach for theatrics. Every single trader has his own war stories with those infamous 17 olds; I remember seeing them trading below forty cents on the dollar, back in February of 2016.

It’s the end of an era. The Bachaquero of Wall Street has pulled off his last, biggest trade yet.

For the past three years, coinciding with the calamitous fall in oil prices that has turned the Venezuelan economy from a hotbed of macro disequilibria into full-blown economic disaster, there has been a strategy in the Venny bond market that has paid off massively with what seems like minimum risk. We first covered it back in October of 2015, dubbing it the ‘Bachaquero of Wall Street’ trade.

It really is the financial world’s answer to bachaquerismo: the whole game is to put yourself first-in-line to collect from the Venezuelan government. The point here is to combine a rock solid faith that the Maduro administration has the willingness and/or ability to pay the next bond that comes due with a commitment to indefference towards the huge mess the Venezuelan economy has gotten into.

Some investors have made impossible returns on the back of this trade — as much as 114% annualized returns (they doubled their money and then some more!) in the past twelve months. Of course, timing is everything: buy too late and most value will be gone by the time you’re able to find some bachaqueated bonds.

Price return chart of the PDVSA bonds due in 2017 (blue = 17 “olds”, which matured last week; orange = amortizing 17 “news”, due in November 2nd). The starting point is ‘The Quincena From Hell’, a two-week period of market distress where Venny bonds hit all-time lows. Add in an extra 12-15% from accrued interest for the total return figure. Source: Bloomberg Professional Service.

Recently, the bond market has figured out the way to price Maduro & Co’s  ‘como vaya viniendo vamos viendo’ approach. VENZ/PDVSA bonds closest to maturity (deemed most likely to be paid) trade at systematically higher prices than the rest of the curve. The reason is straightforward: as investors are chasing and hoarding (ie. keeping to maturity) a relatively small fraction of the external debt outstanding, the rest of the pile of bonds (or loans, promissory notes, repos… you name it) lingers at bargain-basement prices, with nasty price swings to boot.

Market momentum keeps pushing up the prices in the short end of the curve at the expense of medium- and long-term bonds in a self-reinforcing pattern. The relationship also reflects the unorthodox (or, well, perfectly mad) policy mix that includes creative financing mechanisms with secondary (‘one-off’) sources of liquidity, such as depletion of external assets and import cuts. Together, the policy ensures that this year’s debt repayment capacity remains intact — and ain’t nobody have time to worry about the economic and humanitarian costs.

Figure 2: Price-duration ‘curve’ of Venezuela and PDVSA bonds. Highlighted: PDVSA 8,50% of 2017 (‘the next-in-line’ bonds), and PDVSA 8,50% 2020 (‘the Citgo-backed’ bonds).
Source: Bloomberg Professional Service.

Over the past three years, the ‘Bachaquero of Wall Street’ trade has been a consistent winner, delivering a massive outperformance, both versus the rest of any other bond in the Venezuelan curve….

 

…not to mention against most (if not all) major asset classes worldwide:

 

Figure 4: Three-year evolution of the ‘Bachaquero of Wall St’ trade, compared against the total returns of the major global asset classes. Notice how the outperformance begins in earnest after the beginning of 2016.
Source: Bloomberg Professional Service, own calculations.

But notice how the outperformance against the world begins in earnest after the beginning of 2016? That makes me uneasy — and give us our best hint yet that this is the end of an era.

At school, they teach you that markets are efficient, because rational investors push the prices of stocks and bonds towards ‘risk-neutral, arbitrage-free, informationally-efficient’ prices that reflect the sum total of what is known about an asset. But Vennyland seems to be a living, breathing refutation of the Efficient Markets Hypothesis.

For one thing, the market appears to have mispriced the risk of the Republic and/or PDVSA defaults for several years in row. Investors never dreamed the government would go as far as it has in terms of creative financing and underestimated its capacity to cut imports, too. However, this appears to be no longer the case: prices in the short end of the curve are close to the 90% level, no longer the attractive risk/reward proposition of years past.

The external debt policy of the Maduro administration (and the Bachaquero of Wall Street trade it has nurtured) is the central paradox of the Bolivarian Socialism.

So does this mean that the Bachaquero of Wall Street trade was literal ‘bachaqueo’? Just jostling for position in line for a windfall sure to run out soon? If this were to be the case (*shudder*) the arbitrage will eventually self-correct. Either market prices align, or the underlying macro imbalance generating the arbitrage breaks down.

So now that all good information has been priced into bond prices, what else might keep the party going? How about you take a cool 5 minutes and read our Editor-in-chief’s latest piece for WaPo to help you put into perspective the current situation taking place in the streets of Venezuela. I couldn’t have spelled out the situation any better.

The external debt policy of the Maduro administration (and the Bachaquero of Wall Street trade it has nurtured) is the central paradox of the Bolivarian Socialism. Like all paradoxes, this one will wind down when its underlying assumptions (of unbroken willingness to pay and just-enough debt-paying capacity) cease to hold. Market axioms will reassert themselves against the highly unpleasant backdrop of a market crash. The timing of it, though, is elusive. Just ask Siobhan Morden, she’ll tell you.

24 COMMENTS

  1. And there are still some who claim that chavismo is a “democracy whose enemies are crazed whiny sissies who deserve to be beaten, tortured and murdered for five decades more”

  2. touché: “Investors never dreamed the government would go as far as it has in terms of creative financing and underestimated its capacity to cut imports, too.”

  3. From the WaPo article “So why does the government insist on paying Wall Street, no matter what? It’s an open-ended mystery.”

    Except it is not a mystery at all. They can only stay in power as long as they can keep up the juggling act. Once they actually default, they cannot deny they screwed up the country, and they will be exposed as the thieves they are and probably strung up from the nearest street light.

    Maduro screwed up and should have allowed the elections to go forward and let the opposition take over just as the country defaults. He could have skipped town with his billions and blamed the default on the opposition.

    • I always thought that it was politically dumb to stay in power with the impending economic Armageddon that Chavismo set up. Give it to the opposition, let them deal with the explosion and come back as a hero.

      But this is only true if you have democratic inklings in your thinking. Autocrats cannot abandon power, not for a second.

      • you forget they manage another extremely profitable trade and that is illicit drugs which is another reason to stay in power. They kill many with weapons, lack of medicine and hunger just add to the list those from drugs and crime related to doing business.

    • Remember that chavistas are professional despots, but amateur thieves. For them the golden goose is just a vehicle to gain and hold power and they don’t know how to not ride her into the ground.

      Imagine all the silent professional thief-apparatchiks who quietly sneak away from the catastrophe into the sunset. I’d love to see a cash flow summary for the Vz government over the past eighteen years. I’d guess there is a net outflow exceeding one trillion USD unaccounted for. That makes for a lot of silent billionaires.

        • Creating the colectivos to keep the military/GNB/police in check, creating dependence by destroying productive capacity, and seducing El Pueblo with socialism all seem pretty professional — right out of the Lenin/Stalin/Mao/Castro playbook.

    • “Maduro screwed up and should have allowed the elections to go forward and let the opposition take over just as the country defaults. He could have skipped town with his billions and blamed the default on the opposition.”

      I’m pretty sure these guys thought this through, yet decided to go on with their ‘suicide willingness to pay’ strategy because:

      1) They miscalculated in their energy market forecasts. They didn’t consider that oil prices would stay lower for longer;
      2) They are greedy and power-hungry to irrational (self-defeating) extremes;
      3) They are worried about a key implication of a government transition: all their secrets would inevitably come to light.

      • They didn’t bring their brown pants in preparation for what awaits for them, as they have in Cristinita the Manipulative a crystal clear example of what will happen if they lose their impunity.

    • It is prudent to highlight that default may not lead to regime change. That is what a group of pro-defaulters who want to ride off into the sunset with their freebies seem to take for granted.
      An example of where that didn’t happen? Zimbabwe. In fact, the country ended up worse off as it tarnished the country’s credibility with regard to debt payments and fostered a culture of defaulters. For more details: http://www.thenational.ae/business/economy/culture-of-default-has-hurt-zimbabwes-credibility#page1

      Make no mistake, the same people suggesting default are the same people that at some point thought it was a good idea to support a paro petrolero, that supported all the improvised actions against the Government because “we don’t have time” yet 15+ years have gone through, etc. And please refrain from bringing up examples about the country’s payment credibility based on “airline debts”, “import debts” and the like as it is public knowledge how many people over-invoiced and actually ended up not bringing anything or asked someone to buy a plane ticket and board a plane carrying 20+ credit cards from other non-passengers with CADIVI allowances.

      The super Editor-in-chief loves to write articles based on loose and overly-simplistic assumptions such as: “…foreign partners have been treating Venezuela as though it’s already in default for quite some time. After all, Venezuela is already shut out of regular credit markets: That’s why it has to keep making those exotic, last-minute deals”. Clearly, super Editor-in-chief turned Wall St. expert has little knowledge about Argentina’s default and its consequences.

      It is also astonishing to read time after time the same thing: cutting everything else to pay bonds such as cutting the imports of food. Why can’t you call a spade a spade, meaning cutting back the food imports and subsequent SUBSIDY of food. Not *just* imports. In every country, imports are paid with money at real prices and with money that was produced. But the devil is in the details as it is easier for super Editor-in-chief to push his pro-defaulting agenda based on the ugly government not importing food for the poor as opposed to the ugly government not wanting to import and giving away food for free. Why? Well I guess because creditors and multilateral entities won’t be very happy to know that should the pro-defaulters succeed, they will do little to enforce the necessary corrective measures. And these are the guys that supposedly are well equipped to lead the country through a default or a restructuring? Right…

      • Thanks for the really good article and references. Bibliography on a page of hyperlinks, sampling from opposite ends of Brietbart to Bloomberg. Imprecision doesn’t hurt until you get into real exchanges, such as free capital markets, and there it costs you. Sometimes immediately, if you’re a trader, sometimes over years if you’re an investor.

        In a way, it’s surprising the regime hasn’t defaulted. They could have saved a lot of foreign reserves, not to mention national assets. I don’t follow it – I leave that to you guys in the pits, for whom the ticker taps.

        I go with the ballpark. Ceteris posted above about the regime. The troubling thing is that people fell for it all. I wouldn’t go near Venny’s – not necessarily rational on my part. I’m old enough to be entitled to some irrationality. If you’re in them, because you follow closely enough, I’ll live this one out vicariously through your success.

        Keep the articles coming!

  4. Great Article Daniel. The Suicide Wiliness To Pay is deeply associated with the gov idea of remaining in power for a prudent timeframe (if 2018 is to soon problems are bigger than expected). This leads the gov to an extreme Cash Flow management that can result in an accidental default or NOT! YTMs give us an idea of the extremeness of this curves. Fact is that the Front Runners Bachaqueros have been rewarded almost more than anything in financial market and many factors/traders/Corps/Sovs/persons/etc. use that to hedge the several economy contraction inside home. This article reminds me one i read back in 2009 “for how long they are going to kick the can”???
    Time will tell, but lessons are realy big here.

  5. So once the pot is scrapped to the last bit and the country is in complete ruins and compromised for years to come in debt they will lend the power to…Henri Falcòn or Manuel Rosales? wow, such a bright future ahead, i can almost hear Diego Torres ringing in the back of my head. ♪ Saber que se puede querer que se pueda… ♪

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