Chilean investors have shown shifting preferences between peso-denominated and inflation-linked (UF) bonds, influenced by inflation expectations and geopolitical developments. Following a period of heightened geopolitical tensions, specifically the conflict in Iran, a Bloomberg survey of 25 analysts and traders last week indicated that 44% anticipated a 5-10 basis point increase in two-year peso bond rates if the Strait of Hormuz remained closed for the entire month. A similar percentage foresaw increases exceeding 10 basis points, with one respondent projecting over 20 basis points. This sentiment arose as consumer prices in March recorded their fastest monthly rise since early 2025, with April's annual inflation expected to surpass the central bank's 3% target, averaging 4.3% by year-end according to the central bank's economist survey.
During this period of elevated inflation concerns, investors favored UF-denominated bonds, a unit linked to inflation. Nearly three-quarters of respondents preferred UF bonds with one to five-year maturities, marking the highest percentage since the survey's recommencement over a year ago. Only 4% favored longer-term IPC-linked instruments with six to eleven-year maturities.
However, a subsequent Bloomberg survey of 24 analysts and traders noted a shift back towards peso-denominated bonds as Washington progressed toward an agreement with Iran, easing inflation fears. One-third of respondents now favor peso-denominated notes with one to five-year maturities, the highest proportion since March. This is reflected in long-term inflation expectations, which are nearly at February's levels, and a decline in the cost of insuring Chilean sovereign debt against default. The percentage favoring UF bonds with one to five-year terms dropped to almost 54% from 72% the previous month. Six-month break-even prices fell nearly 40 basis points on news of the potential agreement, now down 411 basis points from April to 3.06%, near the central bank's 3% target and the lowest since mid-March. One-year rates also fell over 200 basis points during the same period.
The Chilean government is also navigating a period of significant debt issuance. The Senate recently approved a bill allowing the government to borrow an additional $6.2 billion this year, mostly from international markets. Despite this, the additional yield investors demand for Chilean dollar bonds over US Treasuries has narrowed by 24 basis points to 82 points since late March, nearing levels not seen since 2007. The cost of insuring against default also fell below pre-US air strike levels against Iran. The Ministry of Finance plans to sell $5.2 billion in bonds in international markets for the rest of the year. Chile faces $500 million in debt payments this year and $4.3 billion in 2027, with liquid Treasury assets at $4.2 billion in May.
