Chile Peso Bonds Face Fresh Pressure if Strait of Hormuz Stays Shut

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(Bloomberg) — Chile’s peso borrowing costs risk hitting highs for the year in August as the Middle East conflict drags into its sixth month, even as the economy struggles to gain momentum.

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Of the 19 analysts and traders surveyed by Bloomberg last week, nine expect yields on three-year sovereign peso bonds to rise between 5 and 10 basis points this month if the Strait of Hormuz remains closed, enough to reach a record for the year. Another three see an increase of between 1 and 5 basis points.

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The conflict hits economies such as Chile’s particularly hard as it imports almost all its fuel. Consumer prices are rising at their fastest annual pace since September and gasoline costs have started climbing again after a brief dip. Investors are now weighing how long the conflict could last, when shipping through the Strait will resume and how broadly higher energy costs will filter through to the economy.

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“If the Strait remains close, you may see oil back at $100 and with that, inflation fever should continue,” said Jaime Achondo, executive director at the brokerage firm Fynsa. “That is definitely a bad scenario for nominal bonds.”

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Achondo sees three-year yields rising to 5.45%, or “if the panic or energy shock is severe,” to 5.60%. That would be the highest since the first quarter of last year.

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It is coming at a bad time. While figures on Friday showed industrial output rising 1.3% in June from the year earlier, that was the first annual gain since September. Meanwhile, unemployment held steady at a five-year high and manufacturing slid for a sixth month.

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Oil Shock

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The selloff in bonds has closely tracked the rally in oil prices. In fact, the correlation between oil prices and Chile’s three-year government bond yield has risen to its highest level since March 2020, according to data compiled by Bloomberg. 

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“We estimate a 5-basis-point impact on the 3-year bond yield for every 10% increase in the price of oil,” said Erick Martinez Magana, a strategist at Barclays in New York. 

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Still, Brent crude tumbled Monday morning after President Donald Trump said new talks with Tehran would begin today after he called off a planned attack on Iran. The Islamic Republic denied it was in talks with the US.

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Chile’s annual inflation accelerated to 4.3% in June, well above the 3% target and exceeding analysts’ expectations despite lower energy costs. Price growth has only hit the target in three months since early 2021.

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Gasoline costs jumped last week by 32.9 pesos per liter, while diesel rose by 28.5 pesos, according to Chile’s state oil refiner. Those prices went into effect on Thursday and will remain for three weeks, when the government will have to make a decision on whether to inject fresh funds into its fuel stabilization mechanism.