New Chilean Congress is key in polarized election

The presidential elections may be stealing the headlines in Chile, but bond traders will be behind the result of the parliamentarians.

While the market has internalized that the leftist Gabriel Boric and the conservative Jose Antonio Kast would go to the second round of the presidential elections, there is much less certainty about the result of the parliamentary vote on the same day.

The market predicts that local bonds will fall if the left wins a substantial majority of seats in the parliamentary elections scheduled for November 21, and that they will rise if the opposite scenario consolidates.

“The key will be if the left wins more than two-thirds of the seats in Congress“, said Klaus Kaempfe, Director of Portfolio Solutions at Credicorp Capital. In this scenario, the market can expect relevant changes in the pension system, regardless of who wins the presidency, he said.

The country is on the verge of elections in which the two main candidates, Boric and Kast, present diametrically opposed views on the future of Chile. The two contenders are expected to meet in the second round on December 19, according to the latest polls. Meanwhile, with a less predictable outcome, more than 1,000 names are vying for 155 seats in the Lower House and about 170 running for 27 seats in the Senate.

Given that the outcome of the presidential election is foreseeable, the most important result will be the political distribution of the future Congress, he said. Rodrigo Arrigorriaga, fixed income manager and partner of Quest Capital. “The market considers an adverse scenario, therefore, if the center-right achieves a good vote in both houses, the market rates could drop an additional 50 basis points“, said.

Investors fear that the results this Sunday will be similar to those of the May elections, when the ruling coalition suffered a surprising and overwhelming defeat in the seats of the Constitutional Convention, leaving the drafting of the new Magna Carta in the hands of the left and independent. Local assets plummeted as a result.

The “composition of the legislature“Would be decisive for the fixed income market, since this”could increase or decrease the probability of policy execution by the Executive”, According to a report by analysts from Morgan Stanley, among them Gilberto Hernández-Gómez.

However, if the political distribution in Congress ends up being more or less balanced, the most important result would be the difference in votes between the presidential candidates on the left and those on the right, depending on Kaempfe, from Credicorp.

Retirement of pensions

Yield volatility has been the norm in recent months, with debate over the bill allowing a fourth pension withdrawal leading the way. In addition to the elections, the market will continue to be very attentive to the saga of the fourth retirement.

After being rejected in the Senate last week, the bill is now awaiting review in a joint committee. The ten legislators in charge of the debate in this commission must agree on a modified text that can obtain the support of both the Chamber of Deputies and the Senate. No date has yet been set for the next votes.

The rejection of the bill in the Senate – and the internalization of that scenario in previous weeks – along with Kast’s better performance in the polls, have helped bonds this month, compared to previous heavy losses.

Better market conditions have encouraged banks to continue issuing debt. Last week Scotiabank sold 2 million UF that expire in 2033, and Banco Security offered 1 million UF through 2030.

The Treasury of Chile it also benefited from lower returns. Last week it sold 6 million UF in 2028 and 6 million in 2030. The bonds to 2030 were issued at a rate of 1.98%, much lower than the 3.19% in last month’s placement for the same maturity.