Is Venezuela’s bond market looking at the right signals?
Summary
Venezuela bonds have risen as much as 80% this year with increasing hopes for a political transition, but many are acting on the wrong signals.
As talks between Trump and Maduro begin, the base case is that they will reach a political and economic agreement.
Analysts and investors must shift their focus away from mediatic grand gestures and towards behind-the-scenes movements.
Three scenarios
Diplomatic resolution, 60%: Conversations between Donald Trump and Nicolás Maduro are already underway, with the backdrop of military tensions. The resulting political changes and the lifting of sanctions would unlock restructuring talks and simultaneously lead to fast economic growth.
Status quo, 30%: Failing the diplomatic approach and without military attacks, the Venezuelan government could survive and consolidate its position, while the U.S. would maintain sanctions and other forms of pressure. There would not be a restructuring horizon, although there could be singular debt-for-equity swaps.
Military confrontation, 10%: Despite the media’s focus on the U.S. Navy and Air Force deployment, an actual military incursion into Venezuela is probable, but very unlikely. Results could vary wildly, from a hurried transition to protracted civil conflict or fragmentation.
Venezuelan FOMO
Venezuela has become the hot story of emerging market bonds this year. With it comes the “fear of missing out.” The South American nation could be on track to restructure a large dollar-denominated debt pile with a principal of $66 billion, including bonds issued by the Venezuelan government and the state-owned oil corporation, PDVSA. Considering accrued past due interest, the nominal value would be over $102 billion. This would be one of the largest sovereign debt restructurings in emerging markets, right behind Argentina 2001 and Russia 1998.
Venezuelan sovereign bonds have surged as much as 85% this year. Notes with maturity in 2027 rose from 16.75 cents on the dollar at the start of January to a high of 31.08 in November. The same traded as low as 6 cents in 2020 and 2022. PDVSA bonds show lower values, although there is an ongoing debate among analysts over whether both obligations will be treated the same in an eventual restructuring.
Citi has argued that even taking into account a large haircut, current valuations still hold upside potential looking towards an eventual restructuring; with recovery values in the mid to high 40s—including a Value Recovery Instrument (VRI)—, bonds could be worth an additional 30 to 60%.
By comparison, bonds are trading at similar values as in early 2019, when Juan Guaidó’s “Interim Government” and President Donald Trump’s “maximum pressure” campaign raised hopes of political change. Although this was after financial sanctions in 2017 and 2018, the U.S. Treasury had not yet dealt a final blow with strict oil sanctions and even a secondary market trading ban—the latter was lifted in 2023.
Outside of the sovereign debt scene, other investors are scrambling for information about onshore opportunities as well. How can oil companies, real estate funds, or equity funds, position themselves? If both Caracas and Washington, DC removed their fetters on the Venezuelan economy, we could be looking at the largest commodities opportunity since the fall of the Soviet Union.
But there are also problems with this “fear of missing out.” The market has moved mainly with reports of the military deployment, which have been overamplified. And the possibility of a deal between Trump and Maduro, which should be the focus of analysts, is hardly being considered. The phone call between the two on November 21 took most by surprise. Moreover, it was initially framed as the U.S. president issuing an ultimatum, with a threat that never materialised.
Trump has made commitments not to start new foreign military campaigns, after all. He has also consistently shown a preference for negotiated agreements. This does not mean that he would not use all forms of pressure and leverage at his disposal, even including targeted military action.
But how should we read into the military threats and secret phone calls? What are the trends and signals that analysts and investors need to keep in mind, and which pieces of information are, essentially, just noise?
Diplomatic resolution (60%)
The base case is that Donald Trump and Nicolás Maduro will reach a political and economic agreement, as talks between the two have already started. Such a diplomatic resolution does not exclude military force being used by either of the two sides. It is, in fact, expected that that particularly the U.S. will ramp up its pressure to gain more leverage. But in this case, actions will be just shy of direct attacks against the Venezuelan leadership; the intention is to force them to move and accept otherwise unacceptable conditions.
The deal that is presented to the public will most likely incorporate a commitment that Maduro will cease to be president of Venezuela before his term ends in January 2031. There are different ways to achieve this outcome; there could be a recall referendum or an early election with different candidates than in 2024. In Washington, DC, it would be too politically costly not to obtain this concession in a negotiation. The U.S. military could even carry out limited attacks to back this outcome.
The Venezuelan leadership will, on the other side, demand a level of control over the entire process and guarantees that they will not be persecuted, thus remaining as part of the country’s economic and political elite. The alternative, to completely remove the ruling class from power, would necessitate boots on the ground and a de-Baathification process. The Trump administration has signalled it does not want to invade, and it has not deployed the necessary capacity either, sending out only on warships and aircraft.
A successful deal will probably encompass these two pillars. We can also infer that the U.S. will seek economic concessions, as Trump has signed various deals on strategic minerals with Ukraine, the Democratic Republic of Congo, and across multiple Asian countries. Venezuela is not only critical for its oil and gas reserves, but also for its significant but largely uncertified and untapped deposits of minerals, including coltan, copper, gold, cassiterite, bauxite, and iron.
This process will be long and risky. It could take multiple years, perhaps even running into the next U.S. presidential term. And at any point, frictions could lead to either side pulling back from the agreement. A deal will only reach its final goals if there are means to enforce the terms, which has not been the case in past attempts.
Implication: Political change can lead to fast economic recovery
What matters in a restructuring is, of course, the capacity of a state to repay creditors over the long term; in this case, probably 20 years. Besides just considering who will be president, it will be equally important to evaluate the progress of institution-building in Venezuela.
In recent years, the combination of Venezuelan and U.S. rules for the oil sector has been discretionary, based on opaque contracts and short-term sanctions waivers. Concessions are removed with a single stroke, bringing instability and uncertainty to the economy. Clear rules, on the other hand, can serve as the backbone of a successful restructuring.
According to oil industry experts, there are about 1 million barrels per day of “low-hanging fruit.” That is, Venezuela could double its output by essentially fixing existing infrastructure, without even starting drilling campaigns in greenfield projects. Already, ventures that have benefited from sanctions waivers and new contractual frameworks have seen output rise by an average of 50% over one year, with some as much as doubling production. Institutionalisation would mean these beneficial variables apply to the whole country, not just a few isolated cases.
Political change is also expected to produce a broader opening up of the economy, not just in the oil sector. Privatisations have already begun, but timidly and without any transparency. Cases include the Refidomsa refinery in the Dominican Republic in 2021—through a debt-for-equity swap—, the ongoing sale of Colombia-based Monómeros and, inside Venezuela, strategic alliances and outright purchases of hotels, mines, and factories.
With a new vision in Caracas, the state would most likely sell a long list of assets that are idle or running well below their installed capacity, including hotels, airlines, agricultural land, sugar mills, mines, steelworks, petrochemical plants, and more. The significance is not so much the immediate revenue from sales, but the economic activity generated from activating them.
Signals: How do we know if conversations are progressing?
The window for this path to start showing progress is small, until about January. This is in large part because in 2026, the White House will be expected to shift much of its focus to Colombia and Brazil, which will be holding presidential elections. Trump has already shown how far he is able to go to support his favourite contender in recent elections in Argentina and Honduras.
But how can analysts assess the direction that negotiations would take? First, considering Trump’s preference to seek out deals either directly or through close associates. Negotiations over the wars in Ukraine and Gaza are led by actors outside of the bureaucracy, like Steve Witkoff and Jared Kushner, not the Secretary of State. In talks with Caracas, Trump has taken a similar approach by sending another special envoy, Richard Grenell.
Initially, the conversation centred around freeing U.S. citizens wrongfully imprisoned in Venezuela, resuming deportations at a fast pace, and a brand-new agreement over oil and mining. Now that military pressure is also involved, a deal could involve either commitments to fight organised crime and drug trafficking, or even a political transition. However, Trump has never clearly said that he is after the latter objective, while hawkish elements inside his administration are evidently pushing for it.
A negotiated transition will not be straightforward. The Venezuelan leadership is not likely to accept an outcome that makes it look like it is succumbing to imperialist pressures. To this date, it has preferred resisting even at the expense of economic hardship, becoming isolated, and losing popular support. It will thus be improbable that Maduro resigns in favour of an opposition takeover. What could be more feasible as a result of a negotiation is a gradual phasing out.
The role of third countries is also being underestimated. According to various reports, Trump and Lula da Silva have discussed Venezuela in direct conversations, which could have facilitated the later phone call with Maduro. Moreover, Bloomberg recently reported that a Brazilian billionaire travelled to Caracas, allegedly to urge Venezuela’s ruler to step down. Qatar could also once again host talks, as it has good relations with both Caracas and Washington, DC.
Status quo (30%)
The probability of the political front freezing is low. But we can expect it to grow quickly if Trump and Maduro do not progress in either of the two other directions. It is fundamental to understand how the Venezuelan leadership has been especially adept at digging in and biding their time.
The status quo is not that everything remains the same. The regime would adapt to survive, as for instance it has ditched socialist ideas and adopted a partial dollarisation of the economy. But there would continue to be a government that is widely regarded as illegitimate, namely in the West, and that would still be under heavy financial and economic sanctions.
Implication: No horizon for bonds
With no horizon, bonds will take a hit in this scenario. Before anything else, the U.S. cannot be expected to lift sanctions without political change in Caracas, especially after having built a narrative that Maduro is the head of a “narco-terrorist cartel.” Before considering the capacity of the state to repay, sanctions and the non-recognition of Caracas prevent the possibility of a debt restructuring.
There could be the possibility of bonds being used in debt for equity swaps, in a scenario where Maduro remains in power but tries to lure in high-risk foreign investors. There are also estimates that about 30% of bonds are held by Venezuelan nationals and institutions, and they could kickstart swaps without international involvement. Caracas has also entered into agreements to repay commercial debts in the oil sector, in some cases offering creditors a larger share in joint ventures.
However, the Maduro government has thus far refused to carry out broader privatisations through debt for equity swaps, requesting that buyers pay with hard currency. Foreign debt is being shelved, left as an issue that will be resolved once sanctions are lifted.
Signals: Are the two other options failing?
Chances of this scenario predominating will depend entirely on the other two failing. Essentially, it would mean that Trump would fall back into simply maintaining pressure, while for Maduro, it would be all the easier: it would mean his continued survival at the helm.
Trump’s discourse will inadvertently offer many of the signals. Is he making straightforward declarations on Venezuela, such as announcing a deadline, or is he deflecting, mentioning Colombia and other nations instead? The other factor is whether Maduro sees a credible threat to his continued rule. Currently, he does not.
Many analysts and investors have removed this scenario from their projections, believing that the future is binary: either Maduro will give in, or Trump will move in. But this oversimplification means underestimating the Venezuelan leadership’s capacity to stay in power at the expense of everything else, and overstating the South American country’s importance to U.S. and to Trump’s interests.
Military disruption (10%)
The probability of military confrontation has been lowering over the last month. While rhetoric in the media has been heating up, the political cost of an attack has increased. Maduro has been given more time to prepare a defence and a response, which will of course be within asymmetrical warfare; it is absurd to evaluate military capacities on the terms of conventional warfare. Opposition has also been building up in Capitol Hill. As the prospect of war overseas is shown to be unpopular, Republican representatives and senators consider voting for war powers resolutions to save face before the midterms.
The Navy and Air Force deployment is nonetheless impressive, and it comes with the now public goal of the Trump administration that there will be more interventionism in the Western Hemisphere. The reopening of the Roosevelt Roads Naval Station and the reassignment of the USS Gerald R. Ford are a message that the U.S. military’s increased presence is here to stay, and that operations can be sustained and expanded over a longer period than initially expected.
Implication: Throwing dice
If the U.S. military attacks Maduro and his government, the outcome is fully uncertain. This scenario essentially considers targeted air strikes and even covert operations, but shy of an invasion, as there are no plans for it. There is no structured opposition organisation ready to take over, while the armed forces have been thoroughly coup proofed.
The bond market would react positively if it saw the beginning of a smooth transition. However, the country could descend into civil war or become fragmented with armed groups taking over resource-rich regions, undermining the ability of the state to pay creditors. This is what a Libya-style scenario would entail, having little to do with sectarian divisions.
The natural wealth of Venezuela can paradoxically work against its future. Dissidents from the military, guerrillas and criminal organisations could smuggle locally-sourced oil and minerals—notably gold—as well as drugs from neighbouring Colombia to finance themselves in a scenario where a new central government does not manage to control the interior regions. The presence of paramilitaries and Colombian guerrillas has already been reported from Zulia to Bolívar and Delta Amacuro.
Signals: U.S. readying for invasion?
Is the U.S. preparing for a longer-term intervention in Venezuela? If Trump orders air strikes in Caracas, he will “own” the result. We do not know how Venezuelan soldiers, security forces, paramilitaries, and civilian supporters of Maduro would react in such a scenario. And herein lies the problem: we just do not know. Would the Pentagon send in troops to maintain stability and the integrity of a transition government?
So far, the U.S. has brought to the Caribbean Navy and Air Force assets that are always “somewhere.” This is how the world’s superpower projects strength, with a colossal fleet sailing across the entire globe. There are no reports of movements in the Marine Corps or the Army in the vicinity, save for a single, 2,200-strong Marine Expeditionary Unit.
What is the U.S. public’s perception? Has the administration been able to start manufacturing consent towards going to war? Most polls show broad opposition to overseas interventions. A November survey by YouGov found that 45% of respondents are against military action in Venezuela to overthrow Maduro, while only 17% would be in favour. But most importantly, the reality is that a large proportion of the American people does not know about Maduro, and does not care that much about Venezuela’s fate.
Finally, what is Trump’s messaging? Currently, it is quite far-flung from George W. Bush’s blunt 48-hour ultimatum to Saddam Hussein. Instead, the sitting U.S. president is deflecting questions with ambiguity on whether he intends to attack Venezuela or to achieve regime change, often redirecting the conversation to Colombia and other countries. In fact, it is also very distant from Trump’s own discourse in 2019 and 2020, when he openly supported Juan Guaidó’s push to overthrow Maduro.
Elias Ferrer is the director and lead analyst of Orinoco Research.
