Time deposits are instruments issued by financial institutions that are widely used by the general public. They offer the client the possibility of adjusting the value of his money over time with practically no risk, apart from the possibility of the institution where the product is contracted going bankrupt or defaulting on its payments. This profitability is directly and mainly related to the level of the Monetary Policy Rate established by the Central Bank. The MPR is one of the key tools used by the Central Bank to comply with its price stability mandate, increasing it when inflation expectations are above the target and reducing it when they are below it, so as to discourage and encourage activity, respectively.

In historical terms, the period prior to the pandemic was characterized by bounded inflation that was below the median of the Central Bank's target range, averaging an annual variation of 2.43% in 2018 and 2.56% in 2019. In these years the DaP rate averaged 3.42% and 2.96% respectively. Then with the pandemic, came the need to boost activity instead of savings and with that the TPM dropped to 0.5%, implying a drop in the DaP rate to 1.07%.

Covid also led to supply restrictions and excess cash as a result of pension fund withdrawals, which resulted in significant increases in inflation. In fact, annual inflation averaged 11.6% in 2022 and 7.68% in 2023. In order to bring inflation down to levels close to the target, the Central Bank opted to raise the TPM gradually to 11.25% in November 2022, which also translated into increases in the PFP rates, which averaged 9.67% in 2022 and 8.88% in 2023. Given this good level of rates and the excess cash circulating in the economy, the stock invested in DaP increased sharply.

However, the rate offered by the DaP is in clear retreat. Although today it is possible to find deposits with an annual rate of around 5%, given that inflation is converging somewhat faster than estimated to the average of the Central Bank's target range, there is room for the Central Bank to cut the reference rate and we will see it around 4% or 4.25% in the monetary policy horizon, i.e., in the next two years. With this, the DaP rate will continue to fall and its attractiveness relative to other fixed income products will be lower.

It is striking that since 2023 to date, the rate of DaP has dropped by half and the stock invested in these instruments has remained relatively constant. What happens to these participants who remain invested in DaP despite the lower returns?

They may be market players who are not being properly served or perhaps people with low sensitivity to expected profitability. Whatever the case, the call is to look for more profitable alternatives before it is too late.

At Fynsa we have investment funds that present themselves as profitable options for these clients. If the investment objective is to minimize risk and preserve capital value, the Fynsa Deuda Chile Mutual Fund is the best alternative, as it optimally merges exposure to inflation accruals and capital gains in an environment where MPR cuts are expected in the near horizon.

On the other hand, if the investment horizon is relatively longer and there is an appetite for more risk, the Fynsa Deuda Táctica Mutual Fund is the best option, with a slightly longer portfolio that offers exposure to a part of the interest rate curve that maintains room for capital appreciation, which would strongly benefit from an increase in local activity.

Learn more about our funds here. 

Ciro Giraldez
Portfolio Manager Fixed Income Fynsa AGF