Long-Term Rates and the Term Premium: Evidence from Chile

Abstract

Chile is no exception to the high co-movement of sovereign long-term rates observed between EMEs and the United States. In particular, we show that the high co-movement is mainly driven by synchronisation of the term premium. The aggressive monetary policy in developed economies since the financial crisis, and the changing pattern in the profile of investors holding bonds issued abroad, have not only compressed term premia but have also increased their volatility. In this paper, we document these patterns for Chile, showing that in the last few years a larger share of Chilean bonds are being held by investors who are outside the oversight of the US Securities and Exchange Commission, such investors arguably being those who might adjust their portfolios abruptly. This poses a challenge regarding the impact on longer-term rates of monetary policy normalisation in the United States, and the capacity of Chile’s monetary policy to stabilise long-term rates in response to large swings in term premia.

Full publication: What Do New Forms of Finance Mean for EM Central Banks?

Keywords: term structure of interest rates, monetary policy, international finance

JEL Classification: E43, E52, F30