LatAm FI & FX Strategy Viewpoint: Colombia: Elections tightening, risk premia widening

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LatAm FI & FX Strategy Viewpoint: Colombia: Elections tightening, risk premia widening

Macro Drivers of Colombia’s 10Y TES Yield

We estimate a fair-value model for Colombia’s 10y bond yield, using monthly data from

January 2008 to May 2026. The dependent variable is the 10y TES yield, and explanatory

variables are: 10y US Treasury yields, 12m-ahead CPI expectations, the unemployment

rate, and the primary fiscal balance. The model is estimated by ordinary least squares.

The specification is designed to capture the main macro channels driving bond yields:

global duration through UST yields, domestic inflation risk through CPI expectations, the

growth cycle through unemployment, and fiscal risk through the primary balance.

Global Rates, Inflation, Slack, and Fiscal Policy All Matter

The model has strong explanatory power, with an R-squared of 0.87. All variables are

statistically significant. A 100bp increase in US yields leads to a 114bp increase in the

TES yield, highlighting the strong pass-through from global rates to Colombia’s rates. A

100bp increase in inflation expectations is associated with a 123bp increase in the TES

yield, confirming that domestic inflation credibility is a key driver of term premia.

A 1pp increase in unemployment is associated with a 7bp increase in the TES yield. This

likely reflects the fiscal and risk-premium channel: weaker labor-market conditions tend

to coincide with weaker growth, wider fiscal deficits, and higher sovereign risk premia.

Finally, the primary balance coefficient is negative and highly significant. A 1pp

improvement in the primary balance is associated with a 23bp decline in the 10y TES

yield, implying that fiscal consolidation compresses long-end risk premia.

Bullish Outcome: 10-Year TES Yield at 12%