In this document the term structure of interest rates of US and Colombia’s sovereign bonds are decomposed. A four-factor affine model is used, where the first one is a return forecasting factor and the others are the first three principal components of the variance-covariance matrix of the interest rates. For the Colombia’s interest rates decomposition the US forecasting factor is used in order to capture spillovers effects. It is concluded that the interest rates in US does not have any effect over the level of the interest rates in Colombia, buy they do influence the expected excess of return of the bonds and there are effects over the local factors, although the determining local factor of the dynamics of the interest rates is the “level” factor. From the decomposition the expectations of the short interest rate and the risk premium components are obtained. In this regard, it is noted that the value and volatility of the risk premium increases with maturity and this value has been declining over time.
