Chilean pension funds are boosting holdings of foreign bonds to record levels as they turn to debt from countries such as Brazil and Mexico after a dearth of local corporate sales pushed yields to a two-year low.
Chile's six private pension funds tripled holdings of foreign fixed-income assets in the past 12 months to $20 billion at the end of July, while cutting local holdings by $2.5 billion, according to the industry's regulator.
The average peso-denominated corporate bond yield tumbled to 3.72% on Aug. 24, the lowest since April 2008, after a decline in offerings cut the supply of the securities, according to Santiago-based data company LVA Indices. In Brazil, by comparison, local corporate bonds pay yields linked to the country's benchmark 10.75% overnight rate.
“More adventurous investors can buy in other countries in the region where yields are more attractive and swap into local currency,” Ricardo Gomez, head of fixed income at Larrain Vial in Santiago, said in an Aug. 18 telephone interview. “There are opportunities in Brazil, Colombia and Mexico.”
Overseas bond investments can return a yield of more than 500 basis points, or five percentage points, over interest-rate swaps, compared with less than 350 basis points for Chilean bonds, said Rodrigo Nader, who runs a $427 million closed-end fund at Santiago-based Celfin Capital. About 80% of his Deuda Latinoamericana fund is invested in Brazilian and Mexican corporate debt, followed by bonds from Colombia, Peru and international bonds sold by Chilean companies, he said.
Mr. Nader said he plans to reopen his fund to investors in September after selling out of fund quotas in June. “There's a lot of demand,” he said in a telephone interview.
Chilean companies and banks sold $2.4 billion of local bonds in the first seven months of this year, down from $4.1 billion in the year-earlier period, according to the Bolsa de Comercio de Santiago, Santiago's stock exchange. Companies sold a record $7.5 billion in all of 2009 as they took advantage of a temporary suspension of the 1.2% stamp duty on credit.
The $20 billion that pension funds had in foreign fixed-income holdings accounted for a record 16% of their total assets under management last month, according to the pension regulator. The percentage is up from 6.2%, or $6.4 billion, in July 2009 and 0.1% in July 2007, according to the regulator, which doesn't report fixed-income holdings by country.