This strategy involves the purchase and simultaneous sale of fixed income securities of the same or different issuers, or the arbitrage of bond futures and the underlying bonds. Fixed income arbitrage strategies include basis trading, credit spread trading, calendar spread trading, yield curve arbitrage, inter-market spread trading, and mortgage-backed securities arbitrage.
The net position is typically duration neutral (i.e., no material sensitivity to interest rate changes). This strategy can therefore capitalize on small relative price aberrations without having to accept interest rate risk. Positions are typically leveraged to create attractive risk-adjusted returns. Because of the lower volatility and risk of bonds, spreads are smaller and higher leverage is applied than for equity-based strategies.
