The seven AFPs (pension fund managers) operating in Chile recorded a valuation loss of US$7,700 million in September on derivatives contracts tied to U.S. interest rates. A year earlier, those same positions showed gains of US$1,400 million. The figures come from the Superintendency of Pensions and were reported by Bloomberg.
A column published by El Mostrador covered the case with sharp criticism of the managers, which oversee about US$229,000 million. According to that article, over two years the AFPs accumulated bets that would pay off only if the Federal Reserve (the U.S. central bank) continued cutting rates.
The key instrument is the swap, an exchange of payments between an AFP and a foreign bank. It works like a deal between neighbors: you agree to make a payment that changes with the market and receive a fixed payment in return. If the floating rate falls, you gain. If it rises, you lose.
That is what happened. The war between the United States and Iran pushed oil above US$100 per barrel and reignited global inflation. According to CNN Chile, U.S. Treasury yields reached 24-year highs and the Federal Reserve raised its rate for the first time since 2023.
Claudio González, investment director at GH Capital Invest, told CNN Chile that those yields rose from around 4% a year ago to between 5.2% and 5.3% today. "When interest rates rise, the price of financial instruments falls," he said.
Exposure had grown rapidly. A Citigroup analysis cited by Bloomberg estimated that in April the funds had about US$131 million at risk for every basis point (one hundredth of a percentage point) of movement in rates, compared with about US$10.6 million at the start of 2024.
Fund E, the most conservative fund, took the hardest hit. It has recorded an average decline of 10.4% this year, with almost half of that occurring in September. If you are a few years away from retirement and switched to that fund to avoid volatility, this is the figure that directly affects you.
The losses on paper are turning into actual payments. In April, the Superintendency set caps on potential derivatives losses: 3% for funds A and B, 2.5% for C, and 2% for D and E. It gave them 210 days to comply, a deadline that falls on November 4.
To comply, the AFPs are closing contracts that are now worth less and paying the difference to banks such as Bank of America and Citigroup. Emanoelle Santos, an analyst at XTB, reported that the notional amount of these swaps fell from about US$697,000 million in April to US$525,000 million in August. "Exiting is more costly" right now, she warned.
Santos added that at the end of September the net derivatives position stood at -$10.07 trillion, equivalent to 4.4% of the system's assets. Fund C accounted for -$4.08 trillion. She clarified that this figure includes different types of derivatives and does not necessarily represent losses already realized.
Economists do not all interpret the data the same way. Manuel Bengolea, executive director of Octogone Chile, questioned the scale: with about US$47,000 million in dollar-denominated fixed income, such a loss would imply declines of between 13% and 15%, which do not match international indexes. "There is a loss, that much is certain," he said, although he called for interest earned to be taken into account.
Bengolea also pointed to the regulator. In his view, forcing positions to close at the worst possible moment locks in losses that could reverse if rates fall. CNN Chile's headline, meanwhile, reports that other economists attribute more than half the responsibility to management.
The El Mostrador column attributes the herd behavior to the system's rules. AFPs charge fees on salaries rather than returns. In addition, the minimum return is measured against the industry average: if they all lose together, none has to pay out of its own equity.
Neither the Association of AFPs nor the managers Capital, Cuprum, Habitat, Modelo, PlanVital, ProVida and UNO wished to comment. The sources reviewed provide no details about an official letter from Deputy Manouchehri. The next milestone is November 4, when the new limits take effect.