Chile Inflation-Linked Curve Inverts for First Time Since August

Yields on Chilean five-year inflation-linked bonds were higher than those on 10-year debt for the first time since August as traders’ expectations for consumer price increases collapsed.

An inverted curve, with yields on longer maturities lower than those on shorter-term debt, indicates investors may be expecting the economy to slow. The peso fell the most in a month as a report suggested today that manufacturing growth in China, the biggest market for Chilean exports, may contract for an eighth month.

“The curve inverts when there’s a very negative future scenario implicit,” said Cesar Guzman, an economist at Banco Security in Santiago. “We trust that the European authorities won’t allow a financial collapse and the curve should steepen again as the world improves.”

Five-year inflation-linked bonds yields were 2.52 percent at 3:30 p.m. in Santiago, compared with 2.50 percent for the 10-year securities. The two-year breakeven rate, the interest-rate swaps market’s projection, fell 18 basis points, or 0.18 percentage point, to 2.43 percent, the lowest level on a closing basis since February 2010. The peso fell 1.4 percent to 502.25 per dollar, the biggest drop since May 15.

The central bank said this week that inflation would end the year at 2.7 percent, compared with a projection in April of 3.5 percent.

Five-year breakeven inflation measured in the bond market plunged 15 basis points to 2.64 percent. Five-year breakeven inflation in the interest-rate swaps market fell 14 basis points to 2.72 percent.

Copper Drops

Copper, which makes up half of Chile’s exports, fell as much as 2.7 percent to $3.302 a pound on the Comex in New York. Futures on crude oil dropped to below $80 a barrel for the first time since October. Chile relies on imports for more than 95 percent of its oil and gas needs.

“Oil hits Chilean inflation directly,” Guzman said. “Inflation expectations have fallen in line with the deterioration in the global economy, but in the last couple of weeks, as the rest of the world became more optimistic, Chilean inflation expectations kept falling.”

International investors trimmed their net bets against the peso in the forwards market to $9.8 billion on June 19, the lowest since May 30 and down from $10 billion a day earlier. Local investors, a category excluding banks and brokers, reduced their long peso position to a one-month low of $16.6 billion.

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