Fixed Income Arbitrage

Fixed income arbitrage is one important form of arbitrage. In this type of arbitrage, the investment strategies are usually related to hedge funds. The investment strategy involved in fixed income arbitrage comprises of finding and capitalization of the defects in bond pricing.
The processes of fixed income arbitrage are applied in case of financial instruments issued by both private sector issuers and public sector issuers that carry a fixed and contractual flow of income. The majority of arbitrageurs who are involved in this fixed income arbitrage strategy carry out their trading operations on a global basis.

For the purpose of accomplishing both the objectives of minimum unpredictability and stable return, the arbitrageur often concentrates on the United States non-US government bond arbitrage, interest rate swaps, the United States treasury securities, mortgage-backed securities (MBS), as well as forward yield curves.

Fixed income arbitrage is that type of an investment strategy, which tries to gain from chances of arbitrage from securities carrying interest rates.At the time of utilizing the strategy of fixed income arbitrage, the investor presumes counterbalancing positioning in the market in order to avail the benefit of minor price deviations and at the same time, restricting interest rate risk.
The strategy of fixed income arbitrage is principally implemented by the reputed investment banks and hedge fund institutions all over the world. The most basic type of fixed income arbitrage is the swap-spread arbitrage. This comprises of holding counterbalancing short and long positions in case of treasury bonds and swaps. These types of strategies offer comparatively lower degree of return and also, in some instances, substantially large amounts of losses.

Generally, the application of fixed income arbitrage is equated or likened with running ahead of a steamroller for picking up nickels existing on the path. This is because of the risk factor involved in fixed income arbitrage.

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Last Updated on : 1st July 2013

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