Fixed Income Arbitrage in a Financial Crisis (B): US Treasuries in December 2008

Abstract

The B case briefly recounts the action that investment manager James Franey takes in the matter of two U.S. Treasury bonds with identical maturity dates but widely different yields. He must decide what to do next.

Learning Objective: This case may be used: to review bond valuation and associated measures of bonds' price-sensitivities to interest rates; to review the Law of One Price (LOOP) and resulting opportunities when LOOP fails; to describe the mechanics of exploiting violations of LOOP; and to describe hedge fund financing arrangements, particularly short-selling, margin lending, and repurchase (repo) agreements. The case also may be used: to discuss the causes of anomalous securities prices during the 2008 crisis; to explore causes and consequences of the 2008 crisis generally; and to discuss possible interventions by government, central banks, and other oversight bodies.