Safe haven: in both good times and bad, sometimes it's best not to take risks--and seek safety in bonds.

Latin American economies have been on a roll during the last two years. As the economic indicators have shined, so have returns in the region's capital markets, which have been very strong. But, like real life, things change and the party ends. Forecasts for rising inflation rates and high oil prices will put pressures on the region's non-oil producing economies, realities that investors must be willing to confront. For many, whether they are out to protect their money or make it grow, bonds have become the vehicle of choice for the near future.

Eric Vucina, a fund manager at Fondos Mutuos Larrain Vial in Chile, says that demand for equities will have cooled off by year end. And the number of investors worldwide moving from stocks positions to fixed-income investments, whether in Chile or other emerging markets, is not small.

Walter Molano, an economist at BCP Securities in Greenwich, Connecticut, says there are two main reasons why investors--foreigners especially--are jumping on this bandwagon. First is the high level of liquidity in global markets. Lots of liquidity pushes up asset prices. When prices get really high investors begin to look for other places to put their money, often in riskier venues like emerging-market debt instruments. Secondly, Latin America is rich in raw materials, the prices of which have risen strongly over the past few years. 'Adding in those two factors, the region is very attractive from an international investor's point of view" Molano says.

Even as crises strike, such as the corruption scandal plaguing Brazilian President Luiz Inacio Lula da Silva, investors are still lining up. Rodrigo Andaur, head of research financial services company FIT Research, says that there is consensus in the market that Brazilian monetary policy authorities will continue to raise interest rates, currently around 20%. Higher interest rates make bonds more attractive. Investors are keeping a dose eye, too, not only on sovereign and corporate debt in Brazil but in other countries often considered high-risk, such as Venezuela.

Russian and Mexican corporate bonds have become increasingly attractive, Andaur says. Mexico is doing well now that China's currency has strengthened somewhat, which gives the country an export advantage. The best opportunities for fixed-income instruments, he says, are in Brazil.

While few in Chile would dare to recommend investing in fixed-income instruments at the height of a stock-market rally, many here say the country's deep-pocketed pension funds, known domestically as AFPs, and its insurance companies have been investing heavily in corporate and government debt with 10-year maturities or even longer. "There's a lot of liquidity within the AFPs and insurance companies, and there's a lot of margin to invest in domestic fixed-income," says Andaur. According to the private-pension fund superintendent, by the first half of 2005, AFPs were managing US$66.53 billion in assets, which was 16% more than during the same period a year earlier. Of that total, $35.92 billion were investing in debt instruments. As August drew to a close, long-term interest rates were as low as 2.5%. The reason is clear, market observers say: Chile's inflation-indexed, long-term bonds have become a hedge against rising prices.

Risk. "People are saying that they don't want the risk of inflation,' says Franco Parisi, an expert in finance at the Universidad de Chile. "The large growth in monetary liquidity that took place in Chile since 1999 to date will, sooner or later, reflect in inflation, the magnitude of which is a great unknown," he says. "People are consuming more." One clear indicator of greater spending lies in restaurant sales, which during the first half of 2005 grew by 5.4% from the same period a year earlier.

High consumer prices are not the only factors fueling a drop in long-term interest rates. The Chilean peso has strengthened as more dollars have flowed into the country on bond-buying. "Each time the Central Bank raises nominal interest rates, the country fills up with dollars," says Parisi. "Wall Street investors exchange their dollars for pesos and buy bonds with returns assured at more or less 11% on the average." Such capital flow is speculative; it moves in and out quickly, says Parisi. And a lot of it flows into Brazil--where returns are hitting 20%.

EDUARDO CORONADO * SANTIAGO