Jan. 5 (Bloomberg) -- Chilean bond yields fell, led by short-dated inflation-linked notes, as investors sought the relative safety of central bank and government securities on concern that the European debt crisis may worsen.
The yield on inflation-linked government bonds due in January 2015 plunged 23 basis points, or 0.23 percentage point, to 2.22 percent, according to prices from the Santiago stock exchange. The yield on a similar bond due in January 2020 fell eight basis points to 2.42 percent.
The euro and European stocks weakened after France’s borrowing costs rose at a bond sale and amid concern that the region’s banks will have to raise capital. Chilean bond yields fell even as interest-rate swaps rose as traders price in a greater possibility that the central bank refrains from cutting rates this month after data showed the economy grew 4 percent in November and inflation expectations rose.
“The swaps are more driven by what people expect the central bank to do and the bonds by risk aversion,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “There’s a lot of buying from pension funds. Things overseas look ugly.”
The two-year interest-rate swap rose four basis points to 4.43 percent. The one-year swap rate increased three basis points to 4.51 percent.
The inflation forwards market is pricing in December inflation of 0.28 percent and an annual price rise of 4.08 percent, faster than the upper limit of the central bank’s 2 percent to 4 percent tolerance range. Forwards suggest inflation will then slow to reach the bank’s 3 percent target in May, according to data compiled by Bloomberg.
A month ago traders expected prices to fall 0.1 percent in December, with annual inflation of 3.77 percent.
The National Statistics Institute will publish consumer price inflation for December tomorrow. Depending on how fast prices rose last month, the bank may pause, Alarcon said.
“We need to see what happens tomorrow,” he said. “We expect at least 0.3 percent with a risk of 0.4 percent.”
Finance Minister Felipe Larrain said today that a cut in rates would be “reasonable” as growth slows. Policy makers considered a quarter-point rate cut to 5 percent on Dec. 13, before voting unanimously to keep borrowing costs unchanged, the minutes of the meeting showed. Larrain is a non-voting participant in the central bank’s monetary policy committee.
“There’s a lot of demand for central bank paper and there’s a general consensus that yields will fall so there’s a supply and demand issue -- those who have paper don’t want to sell,” said Andres de la Cerda, a money markets trader at Bice Inversiones in Santiago. “The market still feels a rate cut is coming, the question is when and how much.”
The central bank and government this week published their bond plans for this year. The bank plans to sell $3.9 billion of bonds, down from the $11 billion it announced last year. The government plans to sell $6 billion, in line with 2011, and introducing a new 20-year peso bond.
“After the publication of issuance calendars which were primarily long-term we should see some further steepening of the curve,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago.
Economic activity in Chile expanded 4 percent in November, the central bank said today, matching the median forecast of 15 economists in a Bloomberg survey. The government continues to target 5 percent growth this year, although the goal now appears “harder” to achieve, Larrain said today. Deceleration is still in range of previous estimates, he said on a conference call from Paris.
The peso appreciated 0.2 percent to 510.17 per U.S. dollar, the strongest level in almost four weeks even as copper, which accounts for more than half of Chile’s exports, fell in New York.
“At the end of last year the peso didn’t react to positive news in the rest of the world, which was attributed to real demand for dollars, so it may now be catching up,” said De la Cerda.
Offshore investors in the Chilean peso forwards market trimmed their short position in the peso by $340 million on Jan. 2 from Dec. 30, according to data from the central bank.
--Editors: James Attwood, Brendan Walsh
To contact the reporter on this story: Sebastian Boyd in Santiago at firstname.lastname@example.org
To contact the editor responsible for this story: David Papadopoulos at email@example.com