The name of this asset class is interesting: fixed income. In fact, it hasn’t been much help when, at more than a few extended family lunches, I’ve been asked what I do for a living. The truth is that, aside from the coupon, fixed income has nothing “fixed” about it. Gone are the days when bonds were bought with the intention of holding them to maturity, whereas now, although liquidity is always welcome, greater uncertainty has crept into investment decision-making.

A good barometer for the fixed-income market, accessible to any Chilean, is the AFP’s Fund E, the “most conservative” fund, which invests between 95% and 100% in fixed-income assets. At my pension fund administrator, it has posted a -5.97% return so far this year. Ouch. Another good indicator is the 10-year U.S. Treasury bond (GT10), which has performed remarkably well over the past two weeks and has still risen by more than 100 basis points so far this year. 

Let's face it: Anyone who has invested in fixed-income securities this year has had a rough time, and is only now beginning to see the light at the end of the tunnel. But it's still too early to claim victory. The situation remains fragile, and volatility is the order of the day. Just as rates have fallen sharply in recent sessions, we could see a rapid rebound if adverse factors align. To name just one example, an escalation of the conflict in the Middle East, involving a greater number of countries, could send oil prices soaring and thereby fuel inflation, with the resulting impact on interest rates.

Now imagine the following scenario: a bond denominated in UF (inflation-indexed), with an AAA rating (extremely low risk of default), and an annual rate of 4.5% (adjusted for UF inflation plus an additional 4.5%). And best of all? A 1- to 2-year term, meaning you can easily hold it to maturity. A return to the asset’s roots, focused on capital preservation through real returns—a strategy currently available with bank bonds in the local market.

Pablo Gallegos 

Assistant Manager, Money Market Desk