International Capital Flows and Yields of Public Debt Bonds

Marcia Leon

No 345, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The paper analyzes nominal yields of five-year fixed-rate Brazilian Domestic Federal Public Debt (DFPD) bonds in response to fluctuations in international net capital flows to Brazil for the period January 2007 to July 2012. The results show that estimation in differences with error correction obtains a long-run relationship between the yield, the foreign participation in the DFPD and the target Selic rate that reproduces previous results. When the ratio of net foreign long-term fixed-income investments relative to GDP is a substitute for foreign participation in the DFPD, the new explanatory variable is also significant in the long run, when the cointegrating equation includes the yield of five-year United States Treasury bonds. In turn, fiscal balance, investors’ risk aversion, output gap, the tax rate on financial transactions made by nonresident investors and the effective rate of reserve requirements influence the yields in the short run.

Date: 2014-01
New Economics Papers: this item is included in nep-acc and nep-opm
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