Who speaks louder, financial instruments or credit rating agencies? Analyzing the effects of different sovereign risk measures on interest rates in Brazil

Analyzing sovereign risk measures for Brazil, we observe that credit rating agencies are more cautious and conservative than the market to report risk rating improvements, and more rigorous in assigning better risk ratings. In turn, evidence suggest interest rates reflect sovereign risk conditions. However, to date, no study has assessed which measure of sovereign risk has the greatest impact on the yield curve. Using data from March 2004 to August 2019, we investigate whether interest rates respond differently to different sovereign risk measures in Brazil. As a novelty, the results indicate that credit rating agencies “speak louder” in affecting interest rates, i.e., they proved to have greater capacity to affect the yield curve. Therefore, the importance of these agencies is not limited only for financial markets, but also for policymakers, as the slope of the yield curve acts as a leading indicator of the business cycle.