Chilean fixed-income investors are primarily focusing on the actions of the US Federal Reserve and global geopolitical developments, with these external factors overshadowing domestic economic conditions. This is a significant shift, as the impact of a new administration in Chile, led by President-elect José Antonio Kast, and local economic woes are taking a backseat. A Bloomberg survey indicated that 30% of analysts and traders cited both the Fed's moves and geopolitics as the most important drivers for Chilean interest rates in 2026. For January, the Fed's influence was even more pronounced, with 40% identifying US monetary policy as the key factor.
This emphasis on external forces highlights how closely Chile's bond market is linked to global trends. Movements in US yields and changes in risk appetite frequently flow into peso-denominated assets, often having a greater impact than internal political or economic developments. Geopolitical risks have gained prominence, particularly following the political upheaval in Venezuela and renewed tensions between Washington and Beijing. Analysts like Rodrigo Skarmeta of SURA Investments suggest that an escalation of tensions between major powers could lead to a "risk-off" stance, potentially triggering capital outflows from Chilean fixed income into safer assets, thereby pushing local yields higher.
Despite a strong performance in 2025, investors are tempering their expectations for 2026, anticipating lower returns in fixed income. However, opportunities remain, especially in bonds with maturities of three to five years, which are seen as offering attractive risk-adjusted returns. A significant majority, 75% of survey respondents, favor securities with one-to-five-year maturities, and 45% of those prefer CPI-linked debt. Most expect yields to decline, with 60% for nominal bonds and 45% for inflation-linked notes, which would support price gains. Nearly 45% also anticipate a steepening of the nominal yield curve.
The primary concern for investors is not the direction of US monetary policy, but rather the uncertainty surrounding its pace and timing. Pedro Quintanilla-Dieck, a strategist at UBS, noted that while the Fed is likely to cut rates moderately, the timing and speed, as well as potential changes in the Fed's composition, introduce considerable uncertainty. Any volatility in US Treasuries is expected to directly transmit to the Chilean bond market. In contrast, domestic politics are less of a concern, with Kast's inauguration and his fiscal consolidation agenda viewed positively for Chilean assets, expected to limit sharp movements in the yield curve, particularly at the long end.
Adding to the market's dynamics, foreign investors have been increasingly active in Chile's government debt. Non-resident holdings of peso-denominated sovereign bonds surged by $700 million in August to a record $21.04 billion, marking a 42% increase since the beginning of the year. This influx of foreign capital, combined with recent measures to deepen the capital market such as allowing local pension funds to participate in repo and reverse-repo transactions, could further influence bond market performance.
