Chilean Bond Yields Reach 12-Week Low on Central Bank Rate Cut

Chilean bond yields fell to the lowest levels in 12 weeks as traders reacted to the central bank’s surprise rate cut last week.

The yield on the central bank’s inflation-linked bonds due August 2016 fell six basis points to 2.14 percent, the lowest since Oct. 25. The yield on 10-year inflation-linked bonds due February 2021 fell four basis points to 2.34 percent, the lowest since Oct. 20. The yield on 10-year nominal central bank bonds dropped eight basis points to 5.04 percent.

The central bank unexpectedly lowered its benchmark overnight rate by a quarter-point to 5 percent on Jan. 12, even after inflation in December passed the upper end of the bank’s target band. The rate cut came after economic growth slowed and a liquidity squeeze led to a spike in bank borrowing costs last month.

“The curve is falling in both nominal and inflation- linked, which means it’s a reaction to the monetary-policy rate,” said Andres de la Cerda, a money-markets trader at Bice Inversiones in Santiago.

The Chilean peso gained in low trading volume as falling copper stockpiles indicated continued demand for Chile’s biggest export and on buying from institutional accounts.

The peso strengthened 0.8 percent to 499.25 per U.S. dollar, its highest closing level since November, from 503.46 on Jan. 13. The Bloomberg JPMorgan Latin American Currency Index rose 0.4 percent.

Copper accounts for half of Chile’s exports and fluctuations in its price affect the value of the peso.

“Even though the external situation was very negative the market was selling dollars on every bounce,” said Cristian Donoso, a trader at Banchile Inversiones in Santiago. “Despite the downgrades of European countries, the market is still selling.”

The peso slid 0.7 percent on Jan. 13 after closing at a two-month high of 499.89 per dollar on Jan. 12.

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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