Bloomberg News

Chile Pays Lowest Yield Since 2005 on Inflation Bond Sale

October 19, 2011

(Adds comments from IMF official in fourth paragraph, economist in seventh paragraph.)

Oct. 19 (Bloomberg) -- Chile’s government paid the lowest yield on an auction of 10-year inflation bonds since September 2005 as it sold $260 million of fixed-rate and inflation-linked debt.

The government issued 37.5 billion pesos ($73 million) of 10-year fixed-rate bonds at a yield of 5.1 percent today, the lowest since March 2007. It also sold $186 million of inflation- linked bonds, including the 10-year securities at a yield of 2.35 percent, according to data on the central bank’s website. The bonds tied to consumer prices were denominated in unidades de fomento, Chile’s inflation-linked accounting unit.

Chilean bond yields have fallen this year as investors led by pension funds and insurance companies have sought the relative safety of fixed-income securities. The strength of demand reflects the country’s macroeconomic credibility, Nicolas Eyzaguirre, director of the Western Hemisphere department at the International Monetary Fund, said today.

Chilean bonds are “solid gold,” Eyzaguirre, a former Chilean Finance Minister, told a conference in Santiago.

Total demand for the bonds was 203 percent of the amount offered, less than the 493 percent demand at a central bank auction of two-year and five-year fixed-rate bonds yesterday.

In the past two days, Chile’s central bank and government have sold $164 million of fixed-rate bonds and $186 million of inflation-linked bonds. Demand for the fixed-rate bonds totaled $594 million, and for the inflation-linked bonds totaled $378 million, according to central bank data.

Investors’ Outlook

The preference for fixed-rate over inflation-linked bonds suggests that investors expect rates to fall and inflation to remain controlled, said Felipe Alarcon, an economist at Banco de Credito e Inversiones who used to manage bond auctions at the central bank.

“If they’re going so hard into the central bank peso bonds it’s because they see a high risk of rate cuts and that cuts will be big,” he said. “They’re also validating lower inflation. Bid to cover ratios in inflation-linked bonds are in retreat. The inflation-linked market is overbought and while yields aren’t at recent lows, they don’t have much space to fall further.”

The government today sold $61 million each of 20-year and 30-year inflation-linked bonds with yields of 2.8 percent and 2.94 percent, respectively. The yield on the 30-year bonds was the lowest since at least March 2008, and on the 20-year bonds it was the lowest since at least October 2003.

Pension Funds

Chile’s pension funds, which had $133 billion under management as of the end of September, boosted holdings of central bank and government debt by $11 billion in the first nine months of the year to $26 billion, or 20 percent of their total assets, as they reduced foreign equity holdings by $13 billion to $32 billion, or 24 percent of total assets.

The peso weakened for a third day, falling 0.1 percent to 511.51 per U.S. dollar from 510.92 yesterday.

Foreign investors in the Chilean peso forwards market cut their net long position in U.S. dollars to $5.4 billion on Oct. 17 from $5.5 billion on Oct. 14, according to central bank data.

--With assistance from Randall Woods in Santiago. Editors: Glenn Kalinoski, Brendan Walsh

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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