By Marc Jones and Jorgelina do Rosario
LONDON JPMorgan's influential bond index unit on Wednesday put Venezuela's sovereign bonds and the notes of its state oil firm PDVSA on an "index watch observation period" for its main emerging market EMBI index until Jan. 31.
JPMorgan's move follows the U.S. Treasury Department’s recent removal of a ban on secondary-market trading of the country's and PDVSA's bonds.
The restrictions were removed in response to a deal reached between the country's government and opposition parties for the country's 2024 election.
Venezuela and PDVSA have around $60 billion of international bonds outstanding, which are in default.
The bank added that current feedback from investors was evenly split, with approximately half in favour of restoring Venezuela's market value weight in the index, versus the other half in favour of a more measured wait-and-watch approach.
Reuters reported first on Thursday that the bank was sounding out bondholders about normalizing the weighting of the country's international notes in its EMBI indexes.
“I am a bit surprised,” Carlos de Sousa, an EM portfolio manager at Vontobel in Switzerland, said regarding the three-month observation period.
“Even though the bonds are not the most liquid, I don’t see that as hurdle to lifting the weighting. There are other similarly illiquid bonds in the index,” he added, pointing to some of the smaller countries whose debt is included in the EMBI.
JPMorgan's EMBI indexes are the main benchmark for hard-currency bonds issued by emerging market countries and increasing Venezuela's weighting would trigger buying by index-linked funds.
The Wall Street bank had kept the bonds notionally in its EMBI index but dialled their weighting down to zero in November 2019 after Washington had imposed its sweeping sanctions which prevented U.S.-based investors buying the debt.
During the observation period, Venezuelan bonds will continue to remain at their zero-weight, JPMorgan added, and if necessary, the Index Watch period "may be extended to ensure consistency in the direction of travel and integrity of the benchmark".
Bruno Gennari, emerging markets strategist and Sales at KNG Securities LLP in London, said that the bank's decision doesn't come as a surprise after Venezuela's Supreme Justice Tribunal suspended the results of an opposition presidential primary that took place in October.
"The bank is not going to rush on introducing any changes on the weighting given that the United States is ready to reimpose sanctions if Venezuela breaks the agreement," Gennari said.
The U.S. State Department has said it will reinstate sanctions if the government of President Nicolas Maduro does not lift bans on some opposition candidates and free political prisoners and "wrongfully detained" Americans by the end of November.
(Reporting by Marc Jones and Jorgelina do Rosario; editing by Harry Robertson, David Evans and Jonathan Oatis)
