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(Bloomberg) — A massive rally in emerging-market junk bonds has sparked investor appetite for two of the most far-fetched trades: dollar-denominated debt from Venezuela and Lebanon.

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They’re both economic basket cases, plagued by migration crises and rampant inflation. Both have been wallowing in default and it’ll likely be years before they get out. But for investors looking for the next lottery ticket payoff, they’re also too cheap to ignore.

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“When bonds are in the low teens, people buy, because they see it as an option,” said Claudio Zampa, who manages positions in both as founder of Switzerland-based Mangart Capital Management Ltd. “Other countries have restructured, Argentina is doing better, so more aggressive investors say: ‘Why not?’”

High-yield government dollar bonds notched double-digit gains in 2023 and 2024, with notes from Argentina rallying more than 100% last year. With investors wagering the bulk of the gains are petering out amid a challenging outlook for risk assets, they’re turning to the two cheapest sovereign notes in the world. 

Lebanon has already doubled in price in the past three months. And traders at JPMorgan Securities called Venezuela bonds their “biggest conviction trade of 2025.”

They’re long-shot bets that political turnarounds — aided by expectations around President Donald Trump’s policies in the case of Venezuela — will open the door to an eventual debt restructuring.  

“Prices are so low and eventually in the medium to long run they should pay off,” said Carl Ross, a sovereign debt analyst at GMO, which is taking a long-term approach to both places. “There’s also reason for pessimism but over the last couple of weeks there’s more reason to be optimistic.”

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The prospects for Lebanon took a step forward this month when lawmakers elected US-backed army commander Joseph Aoun as the country’s first president in more than two years. A group of bondholders quickly expressed their willingness to discuss a potential debt restructuring for $30 billion dollar bonds in default since 2020. 

That added to a months-long rally that was sparked by signs that the Iran-backed militia group Hezbollah was weakening under Israeli attacks. Bonds due in 2035 have skyrocketed from around 6 cents on the dollar to almost 17 cents, according to indicative pricing compiled by Bloomberg.  

Danske Bank, Pictet Asset Management and Bank of America estimate the price could continue to rise to at least 20 cents. Beyond that, they say, will depend on success in implementing difficult hoped-for reforms.

In the event of a restructuring, Zampa estimates the recovery value to be a little over 30 cents.  

The outlook is murkier for Venezuela, particularly after President Nicolas Maduro managed to stay in power for a third six-year term after overwhelming evidence that he lost the presidential election in July. 

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US sanctions prohibit Venezuela from issuing new debt or negotiating with bondholders over its $60 billion plus interest that it has in default. The political impasse reduces the likelihood of the US easing any of those restrictions, pushing potential debt talks further into the future.

But investors are closely watching signs of re-engagement between the US and Venezuela following Trump’s inauguration. His envoy for special missions Richard Grenell said on Monday that he held talks with Venezuela officials. 

Restructuring Prospects

Expectation is now building over the shape of US-Venezuela policy under Trump, said Francesco Marani, head of trading at Spanish boutique investment firm Auriga Global Investors SV SA. Investors are divided over whether he’ll take a tougher stance or negotiate with Maduro to slow down Venezuelan migration. 

“While Trump has appointed people who are critical of the Maduro administration, there is a scenario where he gets tired of the impasse and cuts a deal,” said Ajata Mediratta, president of Greylock Capital Management LLC, which is a member of the Venezuela creditor committee and holds the debt. “He ran on a platform of ‘America First,’ which is focused on cheaper energy prices and lower illegal immigration — not promoting democracy.”

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The rally in Lebanon is making Venezuela’s debt look comparatively cheap. 

In a note dated Jan. 10, JPMorgan traders said the bonds are at “very attractive levels” with a restructuring as the base-case scenario. They warned, however, that the process will be lengthy and complex, which limits the upside on the prices. 

Even as it sits on the world’s largest oil reserves, the country’s bonds are now the lowest-priced dollar notes in the widely followed JPMorgan emerging-markets index, said Jared Lou, a portfolio manager at William Blair in New York. 

“They could trade well if there is an upside surprise,” he said.  

—With assistance from Maria Elena Vizcaino.

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