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. Last Updated: 07/27/2016

Rising Crude Prices Create 'Safe Haven'

LONDON -- Bonds from Russia and Venezuela have outperformed other emerging debt since last week's attacks on the United States, and their rich oil reserves could make them safe havens if the crude price rises, analysts said.

J.P. Morgan Securities' Emerging Market Bond Index plus, the industry benchmark, rose by 80 basis points in yield to 9.8 percentage points over U.S. Treasuries since the attacks.

Oil producers' bonds have moved around about half this much. The benchmark Brent oil future broke a year high of $27.23 per barrel after the attacks and has been above that level ever since.

"In the short term, there will be the U.S. response, and there will be fears that it is broad in reach and will compromise supply," said Philip Poole, head of emerging-market research at ING Barings in London. Such a mood will probably last a month, but possibly up to six months, he said.

"In the short term, it does lead you to the conclusion that a country like Russia is a safe haven," said Poole.

Analysts highlight Russia and Venezuela as particularly likely to outperform, although bonds of other producers such as Kazakhstan and Mexico could benefit to a lesser degree. Kazakh debt is tightly held and rarely trades, and oil plays a relatively less significant part in the larger Mexican economy than it does in Russia and Venezuela.

According to Nomura International, Russia has a positive oil balance of 15 percent. The balance is the amount that a country produces minus its consumption. It is used to assess the sensitivity of a country to oil prices. Even at lower oil prices, Russia's foreign exchange reserves were soaring.

"They live in a world of financial autarchy, a remnant of the 1998 crisis," said Juergen Odenius, head of global emerging-market strategy at Commerzbank in London.

Russia had to become self-sufficient when it was shut out of international capital markets after its August 1998 default on local currency debt, but its bond prices soared thanks to fast-growing oil revenues. Russian bonds are not set for further price gains because they were already seen as a good risk, so many price gains have already taken place, said Poole.

"In this environment it is more about protecting assets than anticipating upward price moves," he said.

Russia's segment of the EMBI+ was at 995 basis points over Treasuries, around 50 basis points higher than before the attacks, outperforming the index by around 30 basis points.

Yields on Venezuela's segment of the index were at 959 basis points over Treasuries on Tuesday, 40 basis points higher than before last Tuesday's attack, half the move of the index as a whole.

Venezuela would benefit from a higher oil price because rising dollar-denominated revenues will help support its currency, currently perceived as overvalued. Its oil balance is a positive 25 percent of gross domestic product. Rising oil prices reduce the chance of speculative attacks on the currency, said Peter West, chief Latin America economist at BBVA Securities in London. "To speculate against the bolivar now is not something you would think of doing, now they will be receiving more money," he said.