S08 Arbitrage in the Government Bond Market外文电子书籍.PDF

Harvard Business School 9-293-093 Rev. June 28, 1995 Arbitrage in the Government Bond Market?1 On January 7, 1991, Samantha Thompson, who analyzed and traded government bonds for the firm of Mercer and Associates, noticed what she thought were major discrepancies in the prices of a number of long-maturity U.S. Treasury bonds. These apparent discrepancies might permit Mercer and its clients to substitute superior bonds for existing holdings, and pocket a positive pricing difference as well. Her firm could also capture arbitrage profits by taking offsetting positions to the extent that they were able to establish short positions in the overpriced securities. What made this alleged arbitrage opportunity so unusual was that it existed in the U.S. government bond market, the largest, most liquid, and closely watched fixed-income market. As of December 1990, the U.S. Treasury had almost $2.2 trillion of Treasury bills, notes, and bonds outstanding.2 To put this market’s magnitude in perspective, Treasury obligations outstanding at the end of 1990 were 1.8 times as large as total U.S. corporate bonds outstanding, 3.2 times as large as total bank loans outstanding, and 3.0 times as large as total municipal bonds outstanding.3 Throughout the 1980s and early 1990s, raising Treasury debt through the capital markets served as the mechanism for funding the large budget deficits incurred by the federal government. The Treasury market was significant not only for its size, but also for its liquidity. On an average day, approximately 5% of all