Macroeconomic Drivers of Brazil's Yield Curve

Wagner Gaglianone, Gustavo Araujo and José Vicente

No 629, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper investigates how the Brazilian yield curve has responded to macroeconomic fundamentals over the past two decades. Using a set of OLS regressions applied to short- and long-term interest rates, as well as the yield curve slope, we examine the roles of domestic inflation, fiscal stance, economic activity, and external interest rates. Our findings show that domestic inflation and economic activity, together with U.S. yields, exhibit consistent significance across maturities. Fiscal indicators based on primary surplus, rather than public debt, exert a clear effect on short-term rates and the slope, underscoring the relevance of fiscal flows over fiscal levels. Robustness exercises incorporating financial conditions, credit indicators, and the monetary policy stance confirm that short-term rates are especially responsive to financial signals and regime changes, whereas long-term rates are more strongly influenced by external conditions, credit dynamics, and a persistent monetary stance. The analysis is further extended to real interest rates, confirming the robustness of the main results and highlighting the enduring influence of fiscal flows and credit dynamics on the slope and long-term rates. These findings show the importance of credible fiscal and monetary frameworks and provide new evidence on how emerging market yield curves reflect domestic and external fundamentals.

Date: 2025-10
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