Chile’s debt market rakes in money

NO Latin American debt market is benefitting from the “Sell America” sentiment of the last year as much as Chile, where foreign investors are snapping up domestic bonds at the fastest pace ever as a new right-wing government prepares to take office.

Non-resident holdings of peso sovereign debt more than doubled to a record US$14bil in November – the last month for which data is available – from US$6.6bil at the end of 2024.

That increase far outstrips anything seen in other markets in the region.

The jump comes after a five-year hiatus in foreign ownership of local Chilean debt, a period in which the nation tried and failed twice to rewrite its market- friendly constitution following a wave of protests against inequality and poor public services.

That identity crisis in what was once the poster-child for free-market policies in Latin America is now over, with the election in December of the ultra-conservative Jose Antonio Kast (picture) as president.

As copper prices soar and the incoming president looks to slash spending, Chile is back in fashion.

“The combined return of rates and foreign exchange made Chile’s local bonds a decent risk-reward trade in a positive environment for Latin American local markets,” said Anders Faergemann, a senior portfolio manager at Pinebridge Investments in London.

“We saw an opportunity in Chilean peso as it was undervalued compared with improving fundamentals.”

The return of international investors also helped push the extra yield investors demand to hold Chilean dollar debt over US Treasuries down to an 18-year low last month.

Meanwhile, the benchmark stock index has risen to a record and the peso hit a two-year high last week.

Austerity drive

The peso gained 11.6% against the dollar last year, and continued its momentum in the first 16 days of the year with an additional 2.2% jump.

The currency is currently hovering around 880 pesos per dollar, it’s strongest since January 2024. 

“The Chilean peso lagged other Latam currencies over the summer of 2025 but has since caught up amid a renewed focus on fiscal consolidation, which was reaffirmed in Kast’s victory speech after the election,” Faergemann said. 

Kast has pledged to cut government spending by US$6bil in his first 18 months in office, the biggest austerity drive in Chile since 1975.

That comes at a time of mounting concern over budget deficits in regional peers Colombia and Brazil.

It has all made Chile the regional stand out.

In Brazil, non-resident holdings of local debt rose 15% in the first 11 months, while they slid 6% in Mexico.

Colombia had a more positive year, with foreign holdings up 60% after the government sold the equivalent of US$6bil in peso bonds directly to Pimco and implemented a complex total return swap operation which has local notes as collateral.

“From a global perspective, Chile stands out as a solid investment-grade credit with strong fundamentals and important tailwinds,” said Andres Perez, chief economist for Latin America at Banco Itau.

Foreign investors held about 11.4% of local debt issued by the Chilean government as of September, the most since the second quarter of 2022 and up from just 8% at the end of 2024.

That compares with the 10.1% of Brazilian local debt held by international investors as of November, slightly up from the 10.2% it ended at the previous year.

In Mexico, foreign ownership dropped to 11.2% in November, the lowest since 2009 and down from 13.7% at the end of 2024.

Copper boom

The jump in demand for Chilean debt is unlikely to go into reverse any time soon.

The price of copper – which accounts for about half of Chilean exports and a significant part of fiscal revenue – hit an all-time high last week and is up 44% in the past year.

That is supporting a stronger peso and a smaller current account deficit, which is hovering near the lowest level in four years as of the third quarter of 2025.

“Foreign investors will continue to buy Chile local bonds unhedged and recent gains should be sustained, effectively lowering the volatility in the Chile market and reaffirming the positive carry-to-volatility story,” Faegermann said.

“While the low hanging fruit has been reaped, Chile represents the major emerging market themes coming into 2026 in terms of looking for attractive carry-to-volatility stories and benefitting from improving terms of trade trends that are linked to the positive global growth environment.”

Yields on five-year local peso bonds have dropped 29 basis points since November, with the notes now trading at around 5%, levels not seen since September 2021.

“If copper prices remain elevated, mining-related revenues should outperform,” Perez said. “Higher revenues along with spending cuts should lead to lower financing needs and eventually borrowing costs.” 

The 2026 budget currently contemplates US$17.4bil in debt sales this year, of which 70% will be in local currency and 30% in foreign currency.

But Kast’s promises to reduce the fiscal deficit could lead to fewer issuances.

“If supply decreases, rates should fall even further,” said Mariano Alvarez, fixed income manager at LarrainVial. — Bloomberg