Chile’s government paid the lowest yields on record in auctions of 30-year inflation-linked bonds today as investors sought the safest local assets amid increased bets on a deeper crisis in Europe.
The central bank, which managed the auction, set a 2.75 percent yield on the 30-year notes, the lowest level since at least 2008, according to data on its website. The government also sold seven-year and five-year bonds at 2.3 percent and 2.16 percent.
Yields on assets considered the least risky are plunging globally as markets brace for a possible exit of Greece from the euro and Spain’s government wrestles with how to rescue the country’s financial system and still fund regional governments. The Chilean swaps market shows bets on multiple central bank rate cuts even as data show national unemployment is close to the lowest on record and industrial output growth accelerated.
“The market is pricing in two or three rate cuts this year and more to follow next year,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones (BCI) in Santiago. “If there’s a disorderly default or a bank run in Europe we will have many more than that. The market is pricing in contractions in Chilean quarterly GDP, but the Chilean economy still hasn’t acknowledged the disaster brewing in the rest of the world.”
Two-year Chilean interest-rate swaps fell eight basis points, or 0.08 percentage point, to 4.62 percent, the lowest since February. The five-year swap fell three basis points to 4.97 percent.
The U.S. 10-year Treasury yield fell to the lowest ever and the yield on a German two-year bund fell below zero today. The five-year swap rate in euros also dropped to a record low.
Chile’s peso fell to its lowest level since the start of the year as rising bond yields in Spain and Italy fueled bets Europe’s debt crisis is worsening, pushing down prices for the South American country’s copper exports.
The peso tumbled 1 percent to 517.55 per U.S. dollar, the lowest since Jan. 2. The Bloomberg JPMorgan Latin American Currency Index fell 1.2 percent. The Chilean peso’s 6.3 percent decline this month is the biggest among regional currencies tracked by Bloomberg after the Mexican peso’s 8 percent slump.
Yields on Spain’s 10-year bonds rose to 6.61 percent, approaching the 7 percent mark that preceded bailouts in Greece, Ireland and Portugal. The euro reached a two-year low against the dollar while copper, Chile’s main export and a key driver of its currency, fell as much as 2.6 percent in New York.
“The currency is basically following what is going on outside,” said Alejandro Cuadrado, a Latin American currency strategist at Banco Bilbao Vizcaya Argentaria SA (BBVA) in New York. “As the market gets weaker we could go all the way to 525 per dollar.”
Currencies of other commodity exporters also sank today. South Africa’s rand fell 2.5 percent and the Australian dollar slid 1.3 percent.
Offshore investors trimmed bets against the peso for a second day on May 28 to $9.6 billion after they reached $10.2 billion, the highest on record, on May 25.
Chile’s five-year credit-default swaps rose to a four-month high of 122 basis points today, implying there is an 8 percent chance of Chile missing payment on its debt in the next five years compared to 11 percent for Brazil or 17 percent for France. Chile, Latin America’s highest-rated sovereign borrower, has less expensive credit-default swaps than European countries with the highest credit-ratings such as the Netherlands and Denmark.
Even after the default-swap rose, the theoretical cost to Chilean companies of funding in U.S. dollars and swapping the liabilities back to pesos fell as U.S. Treasury yields dropped. The theoretical cost to Chile of issuing a five-year dollar bonds and swapping the liability to pesos fell 16 basis points to 4.67 percent today, more than 50 basis points below the 5.19 percent yield on a fixed-rate central bank bond due in 2017.
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