Chile Swaps Tumble as Commodities, Taxes Damp Inflation Concern

Chilean swaps fell the most in two months and bond yields plunged as falling commodity prices and speculation the government will cut taxes to stem inflation undermined bets on interest-rate rises.

The two-year swap rate fell 13 basis points, or 0.13 percentage point, to 5.27 percent, the steepest one-day decline since Jan. 13. The one-year swap fell seven basis points to 5.16 percent. The yield on 10-year inflation-linked central bank bonds fell nine basis points to 2.56 percent, the lowest in a week. Chile’s peso depreciated for a fifth day.

Commodity prices worldwide are falling on concern that Chinese and European demand is stalling. Copper, Chile’s biggest export, fell the most in two weeks in New York today after a manufacturing index in China indicated a contraction this month. At the same time, Chilean traders have reduced bets on inflation amid speculation the government will cut tax on loans.

“The fall in nominal rates is being driven by lower inflation expectations and lower rate expectations as well as the global correction in yields,” said Sebastian Ide, head of the interest-rate trading desk at Banco de Chile in Santiago. “We have had a major reversion in commodities and there’s been a lot of noise about what the government could do with taxes. The risks on inflation are to the downside.”

Tax Reform

A removal of stamp duty, or tax on loans, as part of the package of tax changes to be presented to Congress next month, would reduce inflation by 40 basis points, Christian Gomez, a trader at Banco Santander Chile in Santiago, said yesterday.

The price of a barrel of West Texas Intermediate crude oil for May delivery fell as much as 2.7 percent today.

The Dow Jones UBS Commodity Index (DJUBSTR) fell 1 percent today, extending its decline this month to 3.4 percent. The yield on 10-year U.S. Treasury debt fell for a third day and the yield on France’s 10-year benchmark fell 10 basis points. Five-year dollar swaps fell for a second day, dropping 3 basis points to 1.35 percent.

Traders now expect the central bank to raise its benchmark lending rate, currently at 5 percent, to as much as 5.25 percent by the end of the year, Ide said. A week ago the swaps market was pricing in a yearend rate of 5.5 percent.

The peso fell 0.8 percent to 488.8 per U.S. dollar. The Bloomberg JPMorgan Latin American Currency Index fell 0.5 percent while emerging-market stocks declined for a sixth day.

‘Knee-Jerk’

Copper makes up more than half of Chile’s exports and China, the second-largest economy, has been its biggest customer for the past three years. A preliminary measure of Chinese manufacturing fell to 48.1 in March, the lowest level in four months, based on data from HSBC Holdings Plc and Markit Economics, and manufacturing in Europe also shrank.

“There’s a no doubt that China manufacturing is on everyone’s mind,” said Flavia Cattan-Naslausky, a local markets strategist at RBS Securities Inc. in Stamford, Connecticut. “Chile will be very affected by China and an unexpected dip of that kind generates a knee-jerk reaction. Having said that, the copper story is not as bad as it seems. There’s still plenty of demand for copper and not enough supply.”

In the last three months of last year, China bought a record $4 billion of Chilean copper, more than double the amount bought by the U.S. and Japan combined.

A euro-area composite index based on a survey of purchasing managers dropped to 48.7 from 49.3 in February, London-based Markit said in an initial estimate today. Readings below 50 indicate contraction.

Offshore investors in the Chilean peso forwards market had a $5.5 billion short position in the peso on March 20.

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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