The influence of global uncertainty and financial shocks, and sovereign risk shock on the Brazilian term structure of interest rate

Global and sovereign risk shocks significantly influence the business cycle in emerging markets. We examine their impact on the nominal and real term structure of interest rates (TIR) and the respective inflation risk premium (irp)) using a SVAR model for Brazil that also includes key macroeconomic variables. An adverse global uncertainty shock steepens both nominal and real TIR by reducing short-term yields, while irp shows less responsiveness. A positive shock to the US 3-year rate (us3yr) elevates nominal and real TIR but flattens their slopes due to a lesser increase at longer maturities; meanwhile, irp rises and becomes steeper. An adverse sovereign risk shock similarly pushes nominal and real TIR, and irp, upward, increasing their slopes. The sign of the covariance of irp with economic activity and inflation is shock-dependent, as is the relationship between the covariance of these variables and irp. Global uncertainty shocks explain approximately 22% of the forecast error variance (FEV) for 1-year real rate, being less impactful for longer maturities, nominal rates, and irp. Shocks to us3yr account for at least 25% of the FEV for nominal and real rates, and irp. Sovereign risk shocks also contribute substantially for FEV of nominal and real yields, and irp.