Business · Markets · 6 hrs ago
Chile’s pension funds face $7.7 billion loss on US rate bets
Chile’s seven private pension funds face a $7.7 billion loss on bets tied to US interest rates.
The funds manage about $229 billion and are the main source of retirement savings for most Chileans.
Over the past two years, they used derivatives designed to gain value if US rates fell, and the strategy initially helped returns.
The Iran war drove up oil prices and inflation, while a US bond selloff pushed yields higher and made the contracts lose value.
The funds’ foreign rate derivatives shifted from a $1.4 billion gain to a $7.7 billion loss between the previous year and September, according to figures from Chile’s pension regulator.
New limits take effect on Nov.
4 and require the funds to unwind many positions, meaning they must pay banks on the other side of the trades to close them.
The exact amount already unwound and the remaining number of contracts are unclear, but the funds must meet interim thresholds on the way to full compliance.
Chile’s seven private pension funds had a $7.7 billion loss on foreign interest-rate derivatives by September, according to the country’s pension regulator.
The funds had built positions that would pay off if US interest rates fell, but rising yields pushed the contracts into losses.
New Chilean rules taking effect on Nov. 4 require the funds to unwind many of those positions.
The funds are paying Wall Street banks to exit contracts as they work toward compliance.
The funds manage about $229 billion in assets and are the main source of retirement savings for most Chileans.
- Who
- Chile’s seven private pension funds, known as AFPs.
- What
- Their foreign interest-rate derivative positions swung to a $7.7 billion loss by September, and new rules require them to unwind many positions.
- When
- The loss was recorded by September; the new rules take effect on Nov. 4.
- Where
- Chilean pension funds and the US interest-rate derivatives market.
- Why
- The funds bet that US rates would fall, but a bond selloff pushed yields higher and made the contracts lose value.
This story does not have two clearly opposing sides.
The pension funds built up derivatives positions that would benefit if US rates continued to fall.
The E funds recorded an average gain of 7.5%, their best performance since 2022.
Chile’s pension regulator imposed new limits on derivative risk, set to take effect on Nov. 4.
The market value of the funds’ foreign interest-rate derivative positions had fallen to a $7.7 billion loss.
New regulations are due to take effect, requiring the funds to unwind many positions.
- Number of funds
- Seven AFPs
- Assets controlled
- About $229 billion
- Derivative positions
- $1.4 billion gain a year earlier; $7.7 billion loss by September
- Exposure by April
- About $131 million for each one-basis-point yield change, up from about $10.6 million in early 2024
- Regulation effective date
- Nov. 4
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What people are saying
They’re going to have to realize the loss at some point, and that’s going to hurt
At first, it worked very well for them because US rates fell
The problem has been the selloff in US rates. That took them from a positive mark-to-market position to a negative one now.