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Chilean Inflation-Linked Bond Yields Climb as Fuel Costs Fall

June 14, 2012

Chilean inflation-linked bond yields rose to a two-month high as investors positioned for slower price increases after the country’s state-owned refiner said fuel costs would fall.

The yield on five-year inflation-linked central bank bonds rose three basis points, or 0.03 percentage point, to 2.5 percent, the highest since April 11. Five-year breakeven inflation measured by the gap between fixed-rate and inflation- linked bond yields fell to 2.6 percent, a decline of 71 basis points from the peak in March.

Traders in the forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, expect prices to rise 0.02 percent this month after they were unchanged last month. That signals the peso value of the unidad de fomento, known as the UF, will be little changed between now and August and pushes up the cost of financing inflation-linked positions.

“It’s expensive to go long inflation,” said Sebastian Ide, head of rates trading at Banco de Chile in Santiago. “There is a lot of selling of UF assets and none of the funds want to buy. It costs about 10 basis points a month to go long breakeven for two years, you would need a major change in the outlook for commodities for it to be worth it.”

Earlier today, contracts showed traders betting on a 0.05 percent decline in prices this month. Two weeks ago, they were expecting an increase of 0.18 percent in May and 0.14 percent in June.

Gasoline Prices

The wholesale price of premium gasoline in Santiago will decline 2.5 percent in the week through June 20, state-owned oil refiner Empresa Nacional del Petroleo said yesterday by e-mail. Low-octane gasoline will fall 2.1 percent.

The lower dollar cost of crude oil and the weaker dollar both contributed to the cheaper fuel, Enap said.

The price of a liter of low-octane gasoline has declined 50 pesos per liter since April, which is “very good news for consumers,” Finance Minister Felipe Larrain said in an e-mailed statement.

One-year breakeven inflation, the average future pace of inflation priced in to the swaps market, declined to a 2012 low of 2.65 percent.

The yield on 10-year inflation-linked bonds fell 1 basis point to 2.50 percent while the yield on fixed-rate bonds fell five basis points to 5.33 percent.

Chile’s peso advanced as a drop in U.S. consumer prices spurred speculation the Federal Reserve will act to boost growth in the world’s biggest economy, offsetting concern fueled by a cut to Spain’s credit rating.

The peso appreciated 0.2 percent to 501.23 per U.S. dollar. The currency has traded in a range of 499.13 to 505.35 this week.

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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