The return of fixed income

In financial terms, the past few years have been very complex for low-risk investors locally. The traditional recipe of investing in local bonds gradually turned into a roller coaster.

Chilean fixed income always presented two great attributes: safe-haven behavior—that is, rising during negative market moments—and low “structural” volatility. Both characteristics were left behind once the discussions about AFP withdrawals began. Thus, the bond market went from having volatility of 2-3% to 5%-6%, and could even exceed 10% as the national political scenario grew more complicated.

In 2021 we saw declines in the AFP's Fund E (a proxy for the local fixed-income market) of up to almost 20%. However, as these types of policies were left behind, local bonds have made a remarkable comeback. From the lows of mid-October last year, Fund E has posted a nominal return of almost 23%. In addition, volatility has fallen around 3.5% compared to last year. All of this in a very complex context for the investment world: a pandemic that hasn't fully ended, war in Ukraine, rising global rates and worldwide inflation, just to name a few points of uncertainty in the markets.

These are undoubtedly good news for investors who need low-risk, peso-denominated assets and once again have an alternative in local bonds. Chilean fixed income seems to be back.

This column was originally published in the newspaper La Segunda on May 26, 2022 [LINK]