Chile Local Debt Sales Hit Pandemic-Era High After Yield Plunge

(Bloomberg) -- Chilean companies are selling bonds in the local market at the fastest pace in four years, as interest rate cuts prompt a move out of short-term debt, sending yields on the longer-dated notes tumbling.

Non-financial corporations have sold $988 million of debt locally in October, most of it in Unidades de Fomento, UF, an inflation-linked accounting unit. That is the most since June 2020, when local yields were at historical lows after the central bank slashed borrowing costs amid the pandemic.

“The sharp drop in rates of more than 100 basis points since the middle of the year has been crucial for the recovery of the credit market,” said Diego Pino, head of trading at Scotia Corredora de Bolsa. That has combined with “good market demand and a healthy buildup in the issuance pipeline.” 

Ten-year UF yields plummeted to 1.82% at the end of September from 3% in early July, hitting the lowest since May 2023. Surging demand has been led by mutual funds as central bank rate cuts reduce the appeal of shorter-term deposits, said Francisco Mohr, head of fixed income at the asset management division of BTG Pactual in Chile. The size of most of the debt sales has surpassed $100 million in October. 

Mutual fund assets invested in debt of over one year leaped 10.7% on the month in September, after jumping 11.5% in August. By contrast, assets invested in debt of less than 90 days fell by 0.7% and 1% in the same two months, respectively.

“In the end, it’s supply and demand,” said Mohr, explaining the slump in yields over recent months.

October Sales

On Oct. 11, holding company Empresas Copec sold 4 million UF in green bonds in two series to yield 2.98% and 3.09%, with demand doubling supply in both cases. A couple of days later, toll-road operator Vespucio Sur sold 14 million UF in two series to yield 3.33% and 3.4%.

The latest sales bring issuance this year to 75.98 million UF ($3.04 billion), more than the 61.24 million UF raised in all of last year. 

Some other names have chosen to tap international debt markets as the US starts to cut interest rates and interest mounts in emerging-market bonds. Latam Airlines’s deal size at the beginning of the month was increased to $1.4 billion from $1.2 billion in the US amid high demand. Empresa de Transporte de Pasajeros Metro sold 155 million Swiss francs of debt, up from initial guidance of CHF100 million.

As sales soared in October, yields came off their lows for the year, with the 10-year note rising back up to 2.43%. While that will probably affect demand for bonds, it’s unlikely to stop companies from tapping the market, said Scotia’s Pino. 

“It’s not enough to curb the strong buying flows observed locally or the interest of companies to issue, as they continue to consider current rate levels attractive,” Pino said. “This is why we expect corporate issuance to continue over the coming weeks.”

Staying Open

Mohr also sees the market remaining active, though probably with less sales than October due to seasonal factors. Demand for local bonds will remain strong and corporates will continue to take advantage of low yields, keeping issuance levels at the average seen so far this year, he said. 

Looking into next year, the trend should also continue, Mohr added. Whatever amount of debt Congress allows the Finance Ministry to issue in 2025 will set the base scenario for corporates, but the market dynamic will continue to be positive.

“The market is open to receive more issuers,” Mohr said. “Maybe it’s still not so open to receiving low credit quality issuers, but from A+ upwards, I think there is a positive dynamic.”

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