JPMorgan Said to Be Reviewing Venezuela's Status in Bond Indexes

(Bloomberg) -- Venezuelan government debt may be entirely removed from JPMorgan Chase & Co.’s flagship emerging-market bond indexes after U.S. sanctions effectively wiped out trading in the securities, according to two people familiar with the matter.

The bank’s index team, which previously said it was reviewing the status of bonds from Petroleos de Venezuela SA in its gauges, is now also considering whether to drop the sovereign notes from its EMBI+, EMBI Global and EMBI Global Diversified benchmarks because of low liquidity, the people said. The broader review comes after the U.S. Treasury Department on Friday put trading restrictions on the sovereign bonds similar to the ones that exist on PDVSA debt.

Removing the notes could compel some of the largest holders of Venezuelan bonds, including Fidelity Management & Research Co., Allianz SE and BlackRock Inc., to dump the debt based on their mandates to closely replicate the benchmark indexes. Trading on both the sovereign and PDVSA bonds has ground to a halt, and it isn’t entirely clear who the buyers would be if the money managers were forced to sell.

Early last week, trading in debt from state oil giant PDVSA all but evaporated after the Trump administration included the securities in sweeping sanctions against Nicolas Maduro’s regime. Trace, Finra’s bond price reporting system, showed zero trades on PDVSA’s debt since Wednesday. On Thursday, Kumaran Ram and Gloria Kim, executives on JPMorgan’s bond index team, alluded to the possibility of PDVSA bonds getting cut from the indexes in a note to clients.

“We are continuing to monitor, and both Venezuela Republic and PDVSA bonds currently remain eligible for the flagship benchmarks: EMBI Global Diversified, EMBI Global, and EMBI+,” JPMorgan’s press office said in an email Monday.

In May 2017, Harvard economist Ricardo Hausmann, an informal adviser to National Assembly President Juan Guaido, called on JPMorgan to cut Venezuela from its indexes so that investors weren’t compelled to buy bonds from a government accused of human rights violations.

“You don’t want to have investors have to have moral qualms about what’s happening to their savings,” Hausmann said at the time. “You don’t want to be rejoicing at bad things happening to people in a country so that you get paid. You don’t need that moral aggravation. It’s easier to just get Venezuela out of the picture. Get it out of the indexes.”

To contact the reporter on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, ;Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Rachel Evans

©2019 Bloomberg L.P.