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Chilean Inflation-Linked Bond Yields Rise to Highest in 2012

Chile’s five-year inflation-linked bond yields rose to their highest level this year on concern the central bank will refrain from lowering its target lending rate tomorrow even as consumer prices fell last month.

The yields on five-year inflation-linked bonds rose five basis points to 2.53 percent, the highest level since Dec. 2 on a closing basis. Five-year breakeven inflation, a measure of the average annual pace of future consumer price increases implied by bond yields, slowed to 2.52 percent.

The five-year swap rate in unidades de fomento, the Andean country’s inflation-linked accounting unit also known as UF, advanced to 2.15 percent, matching the highest since May.

“There were some large sell orders on five-year UF bonds at the auctions today,” said Andres de la Cerda, a money-markets trader at Bice Inversiones in Santiago. “It’s very expensive to maintain positions in UF. If you buy a bond today and sell it at the same yield in a month you will have lost money.”

Consumer prices unexpectedly declined 0.3 percent in June, making it less attractive for investors to hold inflation-linked assets. Policy makers will hold their target lending rate at 5 percent tomorrow and cut the benchmark to 4.75 percent by October, according to a biweekly survey of traders and investors posted on the central bank’s website.

The peso gained 0.2 percent to 492.10 per U.S. dollar at 2:22 p.m. in Santiago. The currency strengthened to a six-year high against the euro today.

The currency has risen 1.3 percent versus the dollar this week, beating other commodity-related currencies such as the Australian dollar and the South African rand as well as major Latin American counterparts.

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