There is a flourishing literature trying to explain the behaviour of US treasury bond returns comoving positively with US stock returns before the 2000’s, and working as hedge assets since then. In Brazil, for the last 18 years, we find that the comovement of treasury bonds and stocks returns has been positive and volatile. Inflation being procyclical or countercyclical and the monetary policy showed up relevant for explaining this behavior, as pointed by the literature for the US. But, considering Brazil as an emerging market, we find that movements in country risk also played a considerable role by making Brazilian bonds and stocks prices move in the same direction, generating more positive bond to stock betas. Controlling for country risk, we find periods that a positive correlation between inflation and output indeed would have generated negative bond-stock betas, as was predicted by Campbell, Pflueger and Viceira (2020). Since a positive beta of an asset imply a positive risk premium, by estimating a term structure model we find that this contributed with 1 percentage point in the term spread of bonds.
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