Impact of macroeconomic surprises on the Brazilian yield curve and expected inflation

•We use unique datasets of Brazilian fixed income swaps: Pre x DI and IPCA x DI.•We split the impact on nominal rates for real rates and inflation expectations.•We test for lagged responses and for the impact of the global financial crisis.•We test for cointegration among the vertices of the yield curves using a VECM.•We improve the literature relating macroeconomic surprises in emerging economies. This study investigates how unexpected announcements in Brazilian and U.S. macroeconomic indicators affect the term structure of nominal interest rates, as well as implicit inflation expectations and real interest rates. Using daily data from March 2005 to December 2012, we employ an extended Vector Error Correction Model to take into account nonstationarity and the long-term equilibrium among different maturities of those curves. We found empirical evidence that macroeconomic surprises, domestic (Brazilian) and external (U.S. American), which lead the market to believe that there might be a higher risk of inflation or an overheated economy, raise nominal interest rates, implicit expected inflation and real interest rates. Surprisingly, in relation to the efficient-market hypothesis, we found that some macroeconomic surprises have a lagged effect on the yield curves. We also tested the impact of the global financial crisis of 2007–09 and found that the crisis affected significantly the direction and magnitude of the responses to macroeconomic news.