Municipal Bond Arbitrage
Categories: Muni Bonds, Trading
Two bonds. Same ratings. Same duration. Same...pretty much everything. Except that one yields 3.76%, and the other yields 3.56%.
Ding ding ding. Arbitrage opportunity.
You make the magic happen by selling as much of the 3.56%-ers as you can, and buying as much of the 3.76%-ers as you can. And you make a spread (ignoring likely alligator spread commissions and transaction costs) of 20 basis points. Risklessly, pretty much. Great work if you can get it.
And the arbitrage industry used to be a Thing when calculations were made slowly, on paper, and there was no global internet. But alas, the slow got fast...and today these opportunities are rare, at best. Investors have to make money the old-fashioned way: by taking risks.