Fixed income arbitrage

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Fixed income arbitrage is an investment strategy generally associated with hedge funds, which consists of the discovery and exploitation of inefficiencies in the pricing of bonds, i.e. instruments from either public or private issuers yielding a contractually fixed stream of income.

Most arbitrageurs who employ this strategy trade globally.

In pursuit of their goal of both steady returns and low volatility, the arbitrageurs can focus upon interest rate swaps, US non-US government bond arbitrage, see US Treasury security, forward yield curves, and/or mortgage-backed securities.

The practice of fixed-income arbitrage in general has been compared to that of running in front of a steam roller to pick up nickels lying on the street [link]. Some arbitrageurs end up flattened. See Long-Term Capital Management.

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