The macroeconomic drivers of the term structure of the USD-denominated interest rates in Brazil

Abstract

In this paper, we model the level, slope and curvature of the term structure of US dollar-denominated interest-rate coupons in Brazil as driven by observable macroeconomic variables. Among the macro indicators, we consider the exchange rate of the Brazilian real against the US dollar, Brazil’s CDS spread, commodity prices, the dollar-denominated forward rate, the LIBOR forward rate, the implied exchange rate volatility, and the Brazilian breakeven inflation. The model fits the yield curve very well, explaining 95% of its variation. The coupon curve increases with the CDS spread, 3-month dollar denominated rate, the LIBOR rate, commodity prices, and the exchange rate volatility. The exchange rate depreciation positively correlates with shorter maturities, but negatively with the long end of the curve. Changes in the breakeven inflation have little impact in the coupon curve.