BLOOMBERG TELEVISION

Tuesday, when markets were down huge, Bloomberg Television inquired what we thought of the PDVSA bond plunge of the past few weeks. We pointed out that PDVSA bonds had done nothing but follow the rest of Venezuela’s external debt bonds down in price. If you look at the first graph below, you will notice that since late march, when PDVSA bonds were issued, until yesterday, Global 34´s, for instance, plunged 15% compared to PDVSA 37´s which dropped a bit less. We told Bloomberg TV there were two reasons why PDVSA bonds performed a bit better. First, from issuance these bonds were arbitraged against Global 18s, 27s and 34s on the basis of “better yield, same debtor and similar period”. Secondly, we believe the bonds have performed better because Venezuelan institutions and individuals (who are still a majority of the holders) are historically prone to hold paper losses instead of realizing them. WHAT NEXT ON PDVSA As we mentioned last Thursday, there was a great chance we would see an overall market rebound. However, the fact that your PDVSA bonds were helped by the rally doesn’t mean you are of out the woods, but we expect that good core PPI figures today and possibly good core CPI numbers tomorrow could inject additional energy to the rebound and hopefully get your bonds higher. Just don’t wait too long after that to start exiting your positions. WHAT WITH TREASURIES China may be the reason behind the swoon in Treasuries of the past two weeks. As you can confirm in the chart below, at least $12.5 billion in 10-year Treasury notes were dumped by “Fgn Official & Intl Accts” during the first week of the plunge. I am sure this week an even larger figure will be reported. In our view, these sellers are Chinese because “they have got motive”. Increasing US rates revalue the dollar, devalue the Yuan and keep the Chinese BoP growing, especially now that China’s yuan rose to a record high against the U.S. dollar after U.S. lawmakers brought up pressure on Beijing to adjust its foreign-exchange policy. Our conclusion: let’s keep checking the weekly updates of the second chart below over the next few weeks. In the meantime, we have been buyers of 10-yr Treasuries this week. As you know, we think Fed rates this year are ultimately going down, not up.