<p>Here are some hand-wavy arguments to suggest that the "no-arbitrage" rule applies here:</p>

<ol>
<li>Bond-buying at the scale that nation-states would do it would drive up prices.  So you'd see yields on Brazilian bonds fall even if coupon rates don't move.</li>
<li>Germany would have to finance such a play by issuing yet more bonds, which would drive German bond prices down and therefore German bond yields up even if coupon rates don't move.</li>
<li>Credit markets would likely punish Germany for taking that kind of risk, pushing German bond yields up further because coupon rates would rise.</li>
<li>Ironically, the piling-in of high-quality foreign money into Brazil could serve to stabilize it, which would again lower Brazilian yields because coupon rates would fall.</li>
<li>and 6. Movement in foreign exchange markets that would further close the gap. (credit to @Gio in a comment above).</li>
</ol>

<p>The net effect: the arbitrage opportunity you've spotted would quickly vanish.  In essence, your plan would amount to Germany volunteering to prop up the Brazilian economy in exchange for being made worse-off.</p>

CC BY-SA 4.0
2019-11-07T01:25:07.263Z
Sounds reasonable.
Danny_R
CC BY-SA 4.0
2019-11-06T21:45:15.043Z
2019-11-06T21:45:15.043Z
heh
<p><a href="http://www.worldgovernmentbonds.com/country/germany/" rel="nofollow noreferrer">Germany</a> has a 10Y bond yield of -0.336%. Meanwhile, <a href="http://www.worldgovernmentbonds.com/country/brazil/" rel="nofollow noreferrer">Brazil</a> has a 10Y bond yield of 6.415%. </p>

<p>Why doesn't the German government issue bonds in order to buy Brazilian bonds? It seems a no-brainer win. Actually, the German government could also issue bonds to invest in the stock market. Sure, there is a risk involved, but on average seems a winner. </p>

CC BY-SA 4.0
2019-11-06T19:33:55.013Z
You are forgetting the currency risk in your apparently “no risk” deal. Plus it is not the job of Governments to speculate on national debts.
Gio
CC BY-SA 4.0
2020-05-03T07:15:22.217Z
You may want to google "carry trade".
Rodrigo de Azevedo
<government-debt><bonds><foreign-exchange><arbitrage>
What prevents a government from issuing debt to finance riskier investments?
Danny_R
# What prevents a government from issuing debt to finance riskier investments?

(Asked by: username_0 on 2019-11-06)

[Germany](http://www.worldgovernmentbonds.com/country/germany/) has a 10Y bond yield of -0.336%. Meanwhile, [Brazil](http://www.worldgovernmentbonds.com/country/brazil/) has a 10Y bond yield of 6.415%.

Why doesn't the German government issue bonds in order to buy Brazilian bonds? It seems a no-brainer win. Actually, the German government could also issue bonds to invest in the stock market. Sure, there is a risk involved, but on average seems a winner.

**Tags:** government-debt, bonds, foreign-exchange, arbitrage

> **Comments:**
> **username_1**: You are forgetting the currency risk in your apparently “no risk” deal. Plus it is not the job of Governments to speculate on national debts.  
> **username_2**: You may want to google "carry trade".  

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## 1 answers

### Answer by username_3 on 2019-11-06. Score: 0 | Accepted answer

Here are some hand-wavy arguments to suggest that the "no-arbitrage" rule applies here:

1. Bond-buying at the scale that nation-states would do it would drive up prices. So you'd see yields on Brazilian bonds fall even if coupon rates don't move.
2. Germany would have to finance such a play by issuing yet more bonds, which would drive German bond prices down and therefore German bond yields up even if coupon rates don't move.
3. Credit markets would likely punish Germany for taking that kind of risk, pushing German bond yields up further because coupon rates would rise.
4. Ironically, the piling-in of high-quality foreign money into Brazil could serve to stabilize it, which would again lower Brazilian yields because coupon rates would fall.
5. and 6. Movement in foreign exchange markets that would further close the gap. (credit to @username_1 in a comment above).

The net effect: the arbitrage opportunity you've spotted would quickly vanish. In essence, your plan would amount to Germany volunteering to prop up the Brazilian economy in exchange for being made worse-off.

> **Comments:**
> **username_0**: Sounds reasonable.  

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