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.
Here are some hand-wavy arguments to suggest that the "no-arbitrage" rule applies here:
- 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.
- 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.
- Credit markets would likely punish Germany for taking that kind of risk, pushing German bond yields up further because coupon rates would rise.
- 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.
- and 6. Movement in foreign exchange markets that would further close the gap. (credit to @Gio 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.