Abstract

ABSTRACT This paper investigates the drivers of long term real interest rates in Brazil. It is shown that long term yield on inflation linked bonds are driven by yields on 10 year interest rates of United States (US) government bonds and 10 year risk premium, as measured by the Credit Default Swap (CDS). Long term interest rates in Brazil were on a downward trend, following US real rates and stable risk premium, until the taper tantrum in the first half of 2013. From then onwards, real interest rates rose due to the increase in US real rates in anticipation of the beginning of monetary policy normalization and, more recently, due to a sharp increase in Brazilian risk premium. Policy interest rates do not significantly affect long term real interest rates.

Highlights

  • Since mid-2000 ́s there is availability of long term interest rate measures for Brazil, expressed in long term inflation linked bonds issued by the Brazilian National Treasury

  • Long term real rates in Brazil are mainly driven by 10 year real rates in United States and 10 year risk premium, measured by the Credit Default Swap (CDS) spreads

  • An attempt was made to assess whether measures of slopes between the 10 and 30 year American real rates and risk premium drive long term real rates in Brazil, but none of them were

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Summary

Introduction

Since mid-2000 ́s there is availability of long term interest rate measures for Brazil, expressed in long term inflation linked bonds issued by the Brazilian National Treasury. The purpose of this paper is to try to find the variables that explain the movements in long term real yields, contributing to the literature on the drivers of real rates in Brazil. Brazils persistent high interest rate levels have always puzzled many economists. Arida, Bacha and Lara-Resende (2004) blamed jurisdictional uncertainty and the lack of convertibility of the Real for the persistently high levels of real interest rates in Brazil, but Gonçalves, Holland and Spacov (2007) failed to find empirical support to this theory, when compared to standard monetary and fiscal factors

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