Foreign Investors Lose Taste for Chilean Local Government Bonds

(Bloomberg) — Foreign investors are selling Chile’s local government debt, pushing their holdings to the lowest in seven years amid poor liquidity and low interest rates. 

Non-resident holdings of bonds issued in the local market fell to $6.6 billion at the end of 2024, from about $10 billion three years earlier, reaching the lowest since December 2017. As a percentage of outstanding debt, it’s now below 8.8%, down from a high of almost 20% in 2019.

In part, Chile is a victim of its own success. A low debt burden and narrow fiscal deficit, plus limited inflation mean interest rates are lower than regional peers. Add to that the tendency of local pension funds to sit on their debt holdings, crimping liquidity, and there is little left to appeal to foreign funds that can access relatively high rates in the US without the currency risk.

“The gradual decline in non-resident holdings of local currency government debt should be viewed in the broader challenging context for EMs in recent years,” said Andres Perez, chief Latin America economist at Banco Itau. But it is also due to “favorable access to financing from domestic sources.”

Chile’s private pension funds managed $188 billion in assets at the end of last year, more than twice as much as the government’s outstanding local-currency debt, providing a ready source of demand. What’s more, that amount is likely to increase if lawmakers approve a reform to the pension system, boosting payments into individual savings accounts after a couple of years.

That would make the government even less reliant on foreign investors.

It’s wasn’t always like this.

Back in 2017 the Finance Ministry was making great efforts to attract foreign investors. It allowed the direct participation of non-residents in local debt auctions, it changed the tax system and started book-building abroad. It also introduced direct market access via Euroclear Bank SA’s settlement system. 

The policy was a success, with the percentage of debt owned by foreigners leaping from under 4% in 2016 to about 16% by the end of 2018. 

But that figure has been in decline since late 2019, dropping below 10% at the start of last year, according to the latest figures available from the Finance Ministry.

The government “is working on measures to strengthen liquidity,” the Finance Ministry said in a reply to questions on Friday. “Within this, the main measure is the potential installation of market makers for Treasury instruments.”

See: Global Investors Are Dumping Colombia Bonds as Petro Risks Mount

Even if local-currency bonds sold abroad are included in the figures, foreigners still hold only 12.9% of outstanding debt, according to the International Monetary Fund. That is less than in Mexico, Colombia, Uruguay and Peru, though above Brazil.

The sale of peso and CPI-linked debt abroad started in 2023, but failed to attract waves of foreign investors. Based on the press releases from the Finance Ministry at the time of all five local currency denominated bonds issued abroad, foreign investors never made up the majority. 

With analysts dialing back on expectations for rate cuts by the Federal Reserve this year as growth remains robust and President Donald Trump threatens to raise trade barriers, the appeal of Chilean debt is unlikely to increase any time soon.

The local central bank extended its easing cycle in December, lowering borrowing costs to 5%, as inflation expectations remain anchored at the 3% target in two years. The spread between Chile’s policy rate and the Fed’s currently stands at only 50 basis points. 

“In the last few years, similar countries have seen a net outflow of capital,” the Finance Ministry said. “In Chile, due to a better credit rating, and lower rates, this affect has been larger.” 

Take inflation into account and Chile’s real benchmark rate stands at just under 0.5%, compared with about 7.4% in Brazil, 5.8% in Mexico and 4.3% in Colombia.

Still, JPMorgan raised the weighting of Chile in its GBI-EM Global Diversified Index, the benchmark for local-currency denominated debt, last week. The weighting rose 13 basis points to 1.87% with the addition of notes due 2034 and 2037.

“I don’t think that the volumes trend will continue to decline, but rather stabilize,” said Alexis Vega, head of market making at Banco de Credito e Inversiones. 

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