Fiscal expectations and sovereign financing costs: evidence for Latin America

The present study aims to analyze and quantify the link between changes in fiscal expectations and sovereign yields in local currency for five Latin American economies (Brazil, Mexico, Chile, Colombia, and Peru) during the period 2010–2025. The empirical strategy follows the approach of Laubach (2009) and uses projections from the World Economic Outlook. To this end, a regression model is estimated that includes public debt and the fiscal balance, along with a set of macroeconomic and financial controls. The results indicate that public debt and fiscal balances have significant effects on 10-year sovereign bond rates in local currency and their term premium, although in a heterogeneous manner across countries. In particular, Peru and Brazil show high sensitivity of yields to deterioration in the primary and fiscal balance, while in Brazil, Mexico, and Colombia, gross debt emerges as a key determinant. In contrast, no significant effects were found for Chile. Furthermore, it is highlighted that the pandemic amplified the sensitivity of sovereign yields to debt in Mexico and Colombia, and to the primary balance in Peru. The findings confirm the importance of fiscal discipline in preserving favorable access to sovereign financing, contributing positively to fiscal sustainability.