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We apply a hidden Markov model of the term structure to modeling the Brazilian swap rate curve. We examine the model's characteristics and its performance in describing the cross-sectional and time-series dynamics of the term structure. Two regimes are identified, a high level and a high volatility regime and a low level and low volatility regime. Both regimes are persistent and are explained by the level and the slope of the term structure. The model is estimated using a Bayesian MCM algorithm that produces consistent standard errors and a reliable method for testing the differences between the model parameters.

Interest rates --- Econometric models. --- Banks and Banking --- Econometrics --- Inflation --- Bayesian Analysis: General --- Computational Techniques --- Financial Forecasting and Simulation --- Interest Rates: Determination, Term Structure, and Effects --- Money and Interest Rates: Forecasting and Simulation --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- State Space Models --- Price Level --- Deflation --- Econometrics & economic statistics --- Financial services law & regulation --- Finance --- Macroeconomics --- Markov-switching models --- Market risk --- Yield curve --- Time series analysis --- Econometric analysis --- Financial regulation and supervision --- Financial services --- Prices --- Econometric models --- Financial risk management --- Brazil