Bloomberg News

Chilean Rate Swaps Climb as Industrial Output Exceeds Estimates

January 04, 2012

Dec. 29 (Bloomberg) -- Chilean interest-rate swaps climbed as data showing industrial production expanded faster than expected in November tamed expectations of rate rises.

The one-year rate rose the most in three weeks to 4.32 percent as of 12:18 p.m. in Santiago. The two-year swap rose three basis points to 4.24 percent.

Chile’s peso pared earlier losses after data showed industrial output grew 2 percent while unemployment fell and retail sales jumped 8.5 percent. Traders had been pricing in rate cuts after central bank minutes published yesterday showed policy makers discussed lowering borrowing costs earlier this month.

“The economic data were positive and rates fell yesterday, so it’s logical that you see a correction,” said Jose Miguel Gredilla, a trader at Banco Santander Chile in Santiago. “We expect a rate cut in January: that’s almost pre-announced. But that doesn’t mean the bank keeps cutting hard in February and March.”

A liquidity squeeze last week in the short-term debt market where banks finance themselves prompted policy makers to open a so-called repo window twice a week that allows lenders to exchange bonds for cash on the promise of buying them back for a fee. The decision to open the facility increases the odds of a central bank rate cut next month, Goldman Sachs Group Inc. economist Alberto Ramos wrote in a note to clients on Dec. 22.

The central bank didn’t accept any assets when it last opened the window on Dec. 27. It opened it again today.

The swaps market is biased towards discounting lower interest rates because of the risk that a deepening of the European debt crisis triggers emergency monetary loosening in Chile, Gredilla said.

Peso Gains

The peso gained 0.3 percent to 520.35 per U.S. dollar. It earlier slid 0.6 percent to 524.65.

The annualized rate banks pay to borrow for between one and three months fell to a two-week low of 6.12 percent on Dec. 27, according to central bank data. Offshore investors in the Chilean peso forwards market reduced bets against the currency to $5.8 billion from $6 billion.

Yields on long-dated Chilean inflation-linked bonds fell today. The yield on a 3 percent Chilean government bond due in 2030 fell eight basis points to 2.74 percent. The yield on inflation-linked central bank bonds due in 2031 fell six basis points to 2.75 percent. The yield on similar bonds due in 2041 fell six basis points to 2.92 percent.

--Editors: James Attwood, Richard Richtmyer

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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