(Bloomberg) -- The pension funds used by millions of Chileans are racing to close out bets on US interest rates that backfired after the Iran war unleashed a global inflation shock, exposing them to billions of dollars of losses.
The seven so-called AFPs, private pension funds that control assets worth about $229 billion and are the sole source of retirement savings for most Chileans, piled into derivatives over the past two years that would pay off if US rates continued to fall.
But they are now contending with a costly double blow: new regulations set to come into effect early next month are forcing the funds to unwind the positions just after a months-long US bond selloff pushed up yields and drove the market values of the contracts deeply into the red.
That’s forcing them to pay Bank of America Corp., Citigroup Inc. and other Wall Street banks on the opposite sides of the trades in order to break the contracts.
Just a year ago, the market value of foreign interest-rate derivative positions held by the AFPs stood at a $1.4 billion gain. By September, that had swung to a $7.7 billion loss, according to figures released on Tuesday by the nation’s pension regulator.