August 23, 2017 / 9:03 PM / a year ago

UPDATE 1-Venezuela bond prices fall on U.S. trading ban report

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By Paul Kilby

NEW YORK, Aug 23 (Reuters) - Venezuela bonds fell on Wednesday following a report the U.S. government was considering a ban on trading in the country's debt, with some securities touching their lowest in 18 months.

The yield on state-run oil company PDVSA's benchmark 2037 bond rose to its highest level since February 2016, with bond prices, which move inversely to yield, falling to 29.0 cents. Venezuela's 2038 sovereign bond fell around 1.5 cents to 34.1 cents in the dollar, according to Reuters data.

The Wall Street Journal reported late Tuesday that the United States was considering temporarily prohibiting U.S.-regulated banks from trading in Venezuelan debt as part of its effort to crack down on President Nicolas Maduro for his role in creating a pro-government superbody with wide-ranging powers.

"My two cents is: we'll end up with a Russia-like ban on primary issues," one hedge fund manager told Thomson Reuters' IFR service. "I don't see it extending to secondary market transactions."

Bonds are initially issued and purchased by large financial institutions in the primary market and are then traded in the so-called secondary market where the bonds' prices can increase or decrease depending on the likelihood of default.

Such measures could have a deep impact on the banks and large institutional investors that hold and trade some of the $60 billion in outstanding Venezuelan government and PDVSA bonds.

"For participants in compliance with U.S. regulations, counsel would likely suggest they shed these bonds, perhaps as the best way to deal with this matter," said Michael Roche, an EM fixed-income analyst at Seaport Global.

Some argue that a ban on secondary trading could actually provide the government with cover and a further excuse to blame the United States for its financial woes.

"The government could take it as an excuse to default, which provides it with more resources as they no longer have to service their debt," said Shamaila Khan, a director of AllianceBernstein's emerging-market debt strategies.

"In a weird counterintuitive way, it could help rather than hurt."

Credit Suisse already has prohibited staff from trading in certain Venezuelan bonds due to reputational risk, according to an internal memo seen by Reuters, saying the bank does not want to be involved in any transaction with a government that violates human rights.

The U.S. government recently slapped additional sanctions on Venezuela due to the creation of the legislative superbody, known as the constituent assembly, which has been labeled a naked power grab by Maduro's opponents.

The White House has yet to comment on the report, but Vice President Mike Pence was due to speak with Venezuelan exiles in Miami later on Wednesday.

Some strategists think the proposal to limit or halt trading of Venezuelan bonds would disproportionately hurt bondholders, while doing little if any harm to PDVSA or Venezuela, which are effectively cut off from bond market access anyway.

"It would cause more damage than good. I don't know how it harms PDVSA or Venezuela," said Siobhan Morden, head of Latin American fixed-income strategy at Nomura.

"The market is trading lower, but I think that passes once we realize that it is not a logical approach."

Goldman Sachs was widely criticized in June for its role in buying $2.8 billion of PDVSA bonds, which the country's opposition said would help the Maduro government raise capital.

Reporting By Paul Kilby; Additional reporting by Dion Rabouin; Editing by Tom Brown and Lisa Shumaker

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