Chilean Pension Funds Cut Derivatives Losses as Bond Rally Lifts Returns

Chilean pension funds reduced their market-value losses on foreign interest-rate swaps to $2.9 billion at the end of October, down from $7.7 billion at the end of September. The funds, known as AFPs, faced earlier losses from large positions in US interest-rate derivatives built over the past two years.

Market Shifts

The October relief came as US Treasuries rallied, with the 10-year yield dropping more than 30 basis points from a peak near 5.3 percent. This decline marked the biggest monthly drop since 2023 and helped conservative D and E pension funds bounce back with gains of 1.8 percent and 3.2 percent respectively. However, yields climbed back up in November, which could bring new pressure on the funds.

Official Scrutiny

Despite the October recovery, Chile's pension regulator is investigating the losses and has opened proceedings against all seven AFPs for possible fiduciary duty breaches. Lawmakers have also questioned whether the funds properly controlled risks as the trades grew.

Context

Pension funds often use complex financial tools like derivatives to manage investment risks and returns for their members over the long term. Sharp movements in global bond markets can quickly change the paper value of these holdings, drawing close attention from government regulators and lawmakers.