American monetary policy normalization and its impacts on the Brazilian yield curve by Gian Barbosa da Silva, Guilherme Pinheiro de Deus, Gustavo Miguel Nogueira Fleury, Lucas Gurgel Leite, Orlando Cesar de Souza Lima, Tatiana de Oliveira Mota (2015).
This study examines the impact of a potential normalization of US monetary policy on the Brazilian fixed interest rates yield curve and discusses the available tools that may be used to mitigate this impact on the domestic fixed income securities market. The models used on the analysis include weekly data from the US Treasury, the Brazilian Credit Default Swap (CDS), the Non-Deliverable Forward (NDF) of the Brazilian Real versus the US dollar and Brazilian fixed interest rates. The sample period extends from September 2006 to January 2015. The study creates a single equation model and the expectations hypothesis to identify the increase in the 10 years US Treasury and a Switching Autoregressive Conditional Heteroscedasticity (SWARCH) model to estimate shocks in CDS and NDF. According to the results of these models and based on the Nelson and Siegel model (1987), the study analyses the effects of an increase in the US interest rates on the term structure of the Brazilian fixed interest rates. Particularly, we highlight the results obtained for 1, 5 and 10 year securities with estimated shocks of 96, 194 and 188 basis points; respectively. Given these results, the study identifies possible tools that the National Treasury may adopt in order to mitigate the consequences of raising US interest rates on the Brazilian fixed income securities market. A contingency plan considers five main tool possibilities: the adoption of extraordinary auctions; the cancellation of fixed-rate and price-indexed securities auctions; floating-rate securities emissions; short duration fixed-rate securities emission; and the cancellation of new auctions in foreign currency.