Chinn, M.D., and H. Ito, 2008, “A New Measure of Financial Openness, “Journal of Comparative Policy Analysis,” Vol. 10 (3), p. 309–322.
Carrière-Swallow, Y. and P. García-Silva, 2013, “Capital Account Policies in Chile—Macro-financial considerations along the path to liberalization,” IMF Working Paper 13/107.
Ebeke, C., and Y. Lu, 2014, “Emerging Market Local Currency Bond Yields and Foreign Holdings in the Post-Lehman Period—a Fortune or Misfortune?” IMF Working Paper 14/29.
Kamil, H., P. de Imus, et al., 2014, “The Effects of U.S. Monetary Normalization of Emerging Markets’ Sovereign Bond Yields: The Different Cases of Brazil and Mexico,” forthcoming.
Sienaert, A., 2012, “Foreign Investment in Local Currency Bonds—Considerations for Emerging Market Public Debt Managers,” The World Bank Policy Research Working Paper No. 6284.
Prepared by Yi Wu (AFR).
New criteria allow companies constituted in countries with at least three sovereign ratings to issue huaso bonds, although only a handful of borrowers have tapped this asset class.
Foreign investors, especially leveraged investors, also get exposure to the local fixed-income market through the swap market.
The figure for Chile is for the third quarter of 2012 and refers to foreign ownership of sovereign debt, which are dominantly bonds, as foreign investors hold little treasury bills.
Chile’s equity market is large compared to others in the region; however, the equity market has remained rather illiquid, as the pension funds act largely as buy-and-hold investors, and much of Chile’s corporate sector is dominated by large conglomerates with correspondingly low float ratios (OECD, 2011; IMF, 2011).
The difference in yields was also unlikely driven by exchange rate factors, as there was no expectation of trend deprecation of the Chilean peso vs. the other currencies.
Nonetheless, as UF bonds dominate the market, foreign investors are more likely to invest in them rather than in nominal bonds.
See http://www.hacienda.cl/english/public-debt-office/new-article-104.html for a detailed discussion of the Article 104 tax regime for fixed income instruments under the Single Funds Act. Huaso bonds are also subject to the new treatment.
CLS is a bank-owned institution that was launched in 2002 to eliminate settlement risk, one of the biggest dangers in the foreign exchange market. The Chilean peso ranks 28th among most traded currencies in the world (BIS, 2013).
Although the yield for the Chilean peso bond issued internationally rose only moderately, it already rose 87 basis points (bps) during February and April when the international market was rather quiet. The bulk of Chile’s externally issued government bonds is in U.S. dollars, except for the $500 million peso-linked bond issued in 2011 (in New York).