This article investigates the dynamics of the Brazilian term structure of yields using a factor model with smooth transition. Latent yield curve factors are extracted through Principal Component Analysis from DI futures rates obtained from B3, covering the period from December 2005 to July 2024. Their temporal dynamics are modeled within a multivariate Smooth Transition Autoregressive framework, allowing both the conditional mean and the autoregressive coefficients to vary smoothly as a function of an observable macroeconomic variable. Among the candidate transition variables, the Selic rate provides evidence of nonlinearity and is selected as the transition variable. Results indicate that factor dynamics differ across regimes associated with lower and higher levels of the policy interest rate, with relevant changes in persistence and cross-factor interactions. The estimated LSTAR specification exhibits strong in-sample fit across maturities, including longer-term ones, suggesting that incorporating smooth transitions improves the empirical representation of the Brazilian term structure.
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