Emerging Market Junk Bond Rally Boosts Investor Interest in Venezuela, Lebanon Debt
A significant surge in emerging-market junk bonds has reignited investor appetite for two highly speculative investments: dollar-denominated debt from Venezuela and Lebanon.
Despite their economic woes, characterized by migration crises and rampant inflation, and prolonged default status, these bonds have become attractive due to their extremely low prices.
Claudio Zampa, founder of Mangart Capital Management, notes that the low prices have lured investors seeking high potential returns. He cites the successful restructurings of other countries, such as Argentina, as a factor encouraging risk-taking.
High-yield government dollar bonds have experienced double-digit gains in 2023 and 2024, with Argentina's bonds outperforming with over 100% gains. As investors anticipate a decline in future returns, they are turning to Venezuela and Lebanon, which are currently the cheapest sovereign notes globally.
Lebanon's bonds have doubled in value over the past three months. JPMorgan Securities has identified Venezuela bonds as their "biggest conviction trade of 2025."
These investments are based on long-shot bets that political turnarounds, potentially influenced by President Donald Trump's policies in the case of Venezuela, could pave the way for debt restructuring.
Carl Ross, a sovereign debt analyst at GMO, emphasizes the potential for long-term payoffs despite the risks. He attributes the recent optimism to developments in Lebanon, particularly the election of army commander Joseph Aoun as president and signs of Hezbollah's weakening influence.
Lebanon's 2035 bonds have skyrocketed from 6 cents to almost 17 cents per dollar. Analysts predict further price increases to 20 cents, with potential for even higher valuations contingent on successful reforms.
The outlook for Venezuela is less clear, given President Nicolas Maduro's continued hold on power despite evidence of electoral fraud. US sanctions prohibit debt issuance or negotiations with bondholders, hampering potential talks.
However, investors are closely monitoring signs of US-Venezuela re-engagement following Trump's inauguration. His envoy's recent talks with Venezuelan officials have raised hopes for a shift in policy.
Francesco Marani, head of trading at Auriga Global Investors, highlights the uncertainty surrounding Trump's approach towards Venezuela. While he may take a hardline stance, there is a possibility of negotiation to address Venezuela's migration crisis.
Despite Venezuela's oil reserves, its bonds remain the lowest-priced in JPMorgan's emerging-markets index. Jared Lou of William Blair believes they could perform well if there is an unexpected positive development.