LONDON, March 25 (Reuters) - Investors who have shunned the high-yielding dollar bonds of the "Toxic Trio" of Argentina, Venezuela and Ukraine may be kicking themselves after a strong Argentine rally over the last year.
While all three countries are rated deep junk by the big three ratings agencies, Argentine dollar-bond spreads over U.S. Treasuries -- the premium investors demand to hold the debt -- have fallen to about 600 basis points from more than 1,000 in the last year. Venezuelan and Ukrainian spreads, in contrast, have skyrocketed.
"The Toxic Trio is actually now the Toxic Duet because Argentina has done very well and gave up their membership this past year," said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management.
This is despite the fact that Argentina is already in default, forced into that state by a U.S. court order to settle with "holdout investors" suing for full repayment of bonds restructured after a 2002 default.
Even as its legal dispute continues, Argentina's debt has rallied, and the prospect that it will see a change of government in elections later this year make it the most popular investment of the former trio.
"Argentina is a rosy story. Distressed investors have come in as the marginal buyer, and they are not the marginal seller," said Aberdeen's Edwin Gutierrez, adding that he took profits from an overweight position in Argentine bonds, bringing it down to neutral.
"Optimism stems from the idea we are going to get regime change at the end of the year, and the developments of late suggest it will be a market-friendly candidate," he added.
Venezuelan spreads have soared to around 3,000 bps from 1,000 in January last year, while Ukraine's have jumped to more than 4,000 bps from around 800 bps.
But bond investors say that in spite of similarities in the levels at which they trade the markets for Venezuelan and Ukrainian bonds are very different.
Ukraine is negotiating a restructuring of its dollar debt, held by a small pool of investors such as Franklin Templeton, PIMCO and Blackrock while Russia holds around $3 billion of its dollar bonds maturing in December.
Its situation, investors argue, is dire, with Kiev asking creditors to write down the face value of their bonds.
While the International Monetary Fund is backing an economic recovery plan with $17.5 billion of loans, it has warned efforts to restore financial stability face "exceptionally high" risks from further conflict and disgruntled creditors.
This means the debt has failed even to attract the interest of specialists in distressed debt who seek out value from assets at the bottom of the market.
Ukrainian bonds currently change hands for well below half their face value.
Venezuela on the other hand, with bonds also trading at under half their face value, is widely regarded as a promising investment prospect.
"The narrative for Venezuela for many years has been 'These guys have so much oil in the ground and it's been a policy that they are very keen to service their debt'," said Colm McDonagh, head of emerging market debt at Insight Investment, which is part of BNY Mellon.
Venezuela's government recently renewed its habitual pledges to honour its debt despite deteriorating economic headwinds such as falling oil revenues on account of a sharp decline in energy prices.
"The yields are so attractive, if they don't default in the next month or two, you miss out on a lot of carry," said James Barrineau, co head of emerging debt at Schroders.
Much of this investor optimism does not extend beyond this year, however.
"My concern is that they get through this year, but the longer things go on without policy adjustment the harder it becomes, the odds of default go up over time. They need to make adjustments before they run out of various unorthodox options," said Stuart Culverhouse, Global Head of Research at brokerage Exotix. (Additional reporting by Sujata Rao; Editing by Hugh Lawson)