Chilean Long-Dated Swap Rates Fall After Fed’s Growth Warning

Chilean interest-rate swap rates with long maturities fell and short-dated swap rates rose after the U.S. warned that the economy may decelerate even as economists expect Chile’s central bank to lift borrowing costs.

Two-, three-, five- and 10-year swap rates in pesos all declined, as did inflation-linked rates. Three-month, six-month and one-year swap rates rose.

The U.S. Federal Reserve yesterday said it would keep its benchmark interest rate close to zero for an extended period to bolster the economic recovery. Chile’s central bank will tomorrow increase the benchmark rate to 2 percent from 1.5 percent, according to 14 of 16 economists in a Bloomberg survey.

“What we’ve seen today in curves across Latin America is declining long-end rates and some flattening of yield curves,” said Roberto Melzi, a Latin American rates and currency strategist at Barclays Capital in New York. “The Fed said it is worried and that has led market participants to price in a worse outlook for the U.S. If the Fed is concerned about U.S. growth that may brake global growth and that may be a brake on the Chilean central bank.”

The gap between one-year swap rates and five-year or 10-year rates fell as the yield curve flattened. The spread between five-year swaps and one-year swaps fell to 1.25 percentage point, the lowest since March 2009. The spread between one-year and 10-year swaps reached 1.82 percent.

‘Lower for Longer’

The flattening of the yield curve reflects investors greater willingness to invest in emerging market assets for longer periods because of the likelihood of U.S. rates remaining “lower for longer,” Melzi said.

Three-month swap rates in pesos reached the highest since March 2009 as traders priced in a rate rise tomorrow.

The yield on a basket of inflation-linked central bank bonds due in 10 years fell for a third day, dropping five basis points to 2.64 percent. The two-year inflation-linked rate fell eight basis points to 0.43 percent at 3:20 p.m. in New York.

The Chilean peso was little changed at 512.35 per U.S. dollar as weaker global markets offset expectations that the currency will rally on rising interest rates and faster-than- forecast economic growth.

The central bank published a survey of 38 traders and investors whose median forecast was for the peso to climb to 510 next week. The peso had strengthened to a five-month high of 510.85 per dollar on Aug. 9 after exports rose and economists forecast increasing borrowing costs.

“The view of the whole market is that the peso should be higher,” said Luis Morales, a currency trader at Banco de Credito e Inversiones in Santiago. “It’s the external situation that’s keeping it where it is. The external market is mostly down.”

Stocks, Commodities

Global stocks fell the most in two weeks and commodities sank for a fifth day after the Federal Reserve said the pace of recovery in the U.S. is likely to be “more modest” than forecast, the U.S. trade deficit unexpectedly widened and Chinese industrial output rose the least in 11 months. Copper, Chile’s main export, fell for a second day.

“The market’s still constructive on the Chilean peso,” said Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut. The peso could benefit from continued strength of commodities, she said.

Chile’s international peso-denominated bonds may slip as investors take profits from the relative outperformance of the Chilean currency, Siobhan Morden, a strategist at RBS wrote today in an e-mailed note to clients.

The MSCI World Stock Index dropped 2.8 percent while the Thomson Reuters/Jefferies CRB Index of commodities fell 1.3 percent and copper for September delivery lost 1.9 percent.

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