(Bloomberg) — Chilean pension funds narrowed their market-value losses on foreign interest-rate swaps in October as a rally in US Treasuries provided some relief to a system under heavy pressure from politicians to reduce risks and boost payments.
The AFPs, as the funds are known, had $2.9 billion in mark-to-market losses on foreign interest-rate swaps with international banks at the end of last month, according to figures released Tuesday by the pension regulator. That was down from $7.7 billion at the end of September.
The improvement offers some respite for the AFPs after they faced a political backlash over large positions built up in US interest-rate derivatives during the past two years, effectively betting that yields would fall. The strategy initially paid off, but gains reversed sharply this year as a global bond selloff sent US yields surging.
In October, however, US Treasuries rallied again, with the 10-year yield falling more than 30 basis points from a peak of about 5.3%, its biggest monthly decline since 2023. Yields have edged back up again so far in November, a move that could renew pressure on the AFPs.
Chile’s government had already reported that mark-to-market losses on interest rate swaps fell to about $7 billion as of Oct. 20, down from $10.1 billion at the end of September. Those figures included positions held at domestic and international banks, while today’s figures are only for the latter.
It remains unclear how much of the improvement reflected favorable moves in interest rates and how much came from AFPs continuing to unwind their derivatives positions. The deadline for AFPs to bring their derivatives exposures into compliance with new regulatory limits passed in early November.
The turnaround was reflected in pension-fund returns. The more conservative D and E funds, which had been hit hardest by the rise in long-term interest rates, rebounded in October rising 1.8% and 3.2%, respectively. The recovery followed a particularly bruising September, when the E fund lost 4.92%, its worst monthly performance since October 2024, while the D fund also posted steep losses.
The market recovery hasn’t ended scrutiny of the trades. Chile’s pension regulator is investigating the losses and has opened proceedings against all seven AFPs over possible breaches of their fiduciary duties in managing the derivatives positions. Lawmakers have also questioned whether risks were adequately controlled and supervised as the trades ballooned.
And despite October’s rebound, the remaining mark-to-market losses are still substantial, leaving the funds exposed to further swings in long-term interest rates.
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