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Chilean Government Auctions 30-Year Bonds at Record-Low Yield

Chile sold 20- and 30-year inflation-linked bonds at the lowest yield on record even as it scrapped auctions of 10-year bonds for lack of demand.

The 2.6 percent yield on the 20-year bonds was the lowest at an auction since the government started selling the bonds in October 2003 and the 2.74 percent yield on the 30-year bonds was the lowest since sales began in March 2008. The central bank, which manages auctions of government debt, also scrapped a seven-year inflation-linked bond sale, it said on its website.

Long-dated bond yields are falling as investors seek relatively safer investments before a European Union summit in Brussels on June 28 and 29 at which the region’s leaders will seek a way out of their debt crisis. Yields on the longer bonds are falling even as tumbling commodities prices and slower global growth leads traders to trim their forecasts for inflation, which makes owning inflation-linked bonds less attractive and harder to finance.

“The deterioration of the international scenario has pushed down yields at the longer end as the market starts to price in lower interest rates,” said Cristobal Doberti, an economist at Bice Inversiones in Santiago. “At the same time there is less demand for shorter inflation-linked debt because of falling inflation expectations.”

The yield on Chile’s 30-year inflation-linked debt dropped to 2.74 percent in secondary market trading today, matching an eight-month low. The 20-year yield fell six basis points to match the yield set at the auction.

The yield on 10-year inflation-linked bonds rose three basis points to 2.49 percent today after the auction failed.

Inflation Forwards

The forwards market for unidades de fomento, Chile’s inflation-linked currency unit shows traders are pricing in a 0.08 percent decline in prices this month and a 0.02 percent rise in July.

Pension funds tend to dominate 10-year bond auctions and insurance companies are the larger participants in 20-year and 30-year bond sales, according to Felipe Alarcon, who used to run bond auctions for the central bank and is now an economist at Banco de Credito e Inversiones in Santiago.

“There must have been very little demand,’ for the 10-year bonds, Alarcon said. ‘‘The two-year to 10-year curve is steeply inverted and they are waiting for the 10-year yield to come back up. Insurance companies are captive demand in the longer bonds and they may be turning to the safe, underlying bonds instead of spread product like mortgages.’’

The yield on 10-year inflation-linked bonds fell below that on five-year bonds last week for the first time since August.

Chile’s peso gained today as copper, the country’s biggest export, jumped on higher-than-forecast orders for durable goods such as aircraft, cars and washing machines in the U.S.

The peso rose 0.5 percent to 505.95 per U.S. dollar trimming its decline this quarter to 3.5 percent. The Bloomberg JPMorgan Latin American Currency Index gained 0.5 percent today.

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