Bloomberg News

Chile Swap Yields Headed to Weekly Fall on Debt Crisis Pessimism

November 04, 2011

Nov. 4 (Bloomberg) -- Chilean rate swap yields headed to the first decline in four weeks as uncertainty about European leaders’ ability to contain the region’s debt crisis led traders to price in a greater likelihood of central bank rate cuts.

The six-month swap rate declined three basis points today to 4.93 percent at 2:22 p.m. in Santiago. It fell from 5 percent a week ago. The one-year rate fell three basis points today to 4.75 percent, and from 4.82 percent a week ago.

Swap rates had climbed after European leaders reached a deal to boost their bailout fund and said they had persuaded banks to accept a haircut on Greek bonds. They fell this week on uncertainty about whether Greece would accept the deal and whether the bailout would be financed.

“The European situation remains complicated and last week’s sell-off looks as if it may have been overdone as it’s still not clear we’ll have an orderly exit,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago.

The swaps market is pricing in a 25-basis-point central bank rate cut to 5 percent by the end of this year and a further 50-basis-point reduction to 4.5 percent next year, economists at Banco Santander SA wrote today in a note to clients. Interest- rate swap rates reflect traders’ views of the likely average of central bank rates over the life of the contract.

Debt Crisis

The central bank is ready to react quickly to a deterioration in the global economy or a worsening of the European debt crisis, board members said last month.

The fall in rates widened the spread between swaps and bonds as the yield on government and central bank bonds in pesos was little changed even as swap rates fell. The central bank this year trimmed the amount of five-year and 10-year fixed-rate peso bonds it offered at auction and paid the highest yields since August.

“Swaps are following external headlines more closely,” Alarcon said. “The market for physical paper remains a little timid because pension-fund demand for bonds seems to be dropping off.”

The pace of 2012 inflation priced into the forwards market for Chile’s inflation-linked accounting unit, the unidad de fomento, rose to 2.88 percent from 2.65 percent a week ago. The pace of 2011 price increases priced into inflation forwards was little changed at 3.29 percent, according to Bloomberg calculations.

Peso Declines

The peso fell 1.1 percent this week, dropping 0.4 percent today to 496.59 per U.S. dollar, from 494.62 yesterday and 491.15 on Oct. 28.

Governments are awaiting further details of Europe’s week- old rescue package before they commit cash, German Chancellor Angela Merkel said today on the final day of a Group of 20 summit in Cannes, France. Chile relies on exports for about 40 percent of gross domestic product, and on copper for half of its exports, so changes in the outlook for the global economy and commodities prices impact the value of the currency.

“It’s highly unpredictable, just when you think you have some clarity you have all your assumptions blown out of the water,” said Mike Moran, a currency strategist at Standard Chartered in New York. “Trading is based on the news backdrop on a particular day, and what the headlines look like. I’m concerned about how it looks over the next three months to six months. Chile doesn’t correlate well with a slowing global economy. It’s a small, open economy so it’s difficult to be optimistic.”

--Editors: Glenn J. Kalinoski, Marie-France Han

To contact the reporter on this story: Sebastian Boyd in Santiago at

To contact the editor responsible for this story: David Papadopoulos at

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