Refuge From Fed Found in Chile as Ties to Treasuries Break Down

  • Foreign ownership of government debt less than half 2013 level
  • Country files SEC shelf to sell $3 billion of debt securities

Latin America’s best-rated country is providing a hideout for investors seeking to avoid rising U.S. Treasury yields while keeping their money in the safest sovereigns.

Chilean bonds are less correlated to Treasuries than at any point since May 2009, according to a central bank study published last week. And while yields on the debt may be low compared to historical levels, returns are stable. Risk-adjusted returns from Chilean local-currency bonds were the highest in the region in the second half of 2015.
Investors are scouting for alternatives to Treasuries as economists forecast that U.S. government bond yields will rise by as much as 0.76 percentage point next year as the Federal Reserve embarks on its first rate-tightening cycle in 11 years. Chile, the top-rated emerging market along with China, may be an attractive option because the concentration of local holders means the bonds are less vulnerable to rising international yields, according to economists Antonio Moncado at Banco de Credito & Inversiones and Sebastian Senzacqua at Bice Inversiones in Santiago.

“The increase in local yields will be limited, or zero, precisely because the flows which could have a greater impact are in the hands of local institutions,” said BCI’s Moncado.

Foreign ownership of Chilean debt rose following Citigroup Inc.’s decision in 2013 to offer global depositary notes designed to make it easier for foreigners to invest in peso-denominated government bonds. Yet by one measure, holdings have since more than halved. At less than 5 percent, foreign ownership of Chilean bonds is a fraction of the levels in other Latin American markets. Foreigners own more than half of Mexico’s notes.

Chile has the fourth-highest possible rating from Moody’s Investors Service. Standard & Poor’s rates it an equivalent AA- and Fitch Ratings a level lower at A+. That ranks it a level above Japan and in line with China.

The country yesterday filed in the U.S. to sell as much as $3 billion of dollar bonds. It last sold dollar-denominated debt in December 2014, and sold bonds in euros in May.

Chilean pension funds, mutual funds, banks and insurers account for 95 percent of the government debt in Chile’s central clearing house, the central bank said in a report last week. The central bank also conducted a survey of the main custodial banks, which gave a total of 3 percent ownership by foreigners at the end of the third quarter, a more than 50 percent decline from 8 percent in June 2013.

“Because we have such strong demand from local investors -- pension and mutual funds, -- that limits aggressive inflows and outflows from foreign investors,” Senzacqua said. “If there is an episode of rising yields, the impact on local rates may be mitigated.”

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