Strategies · Library · Tax arbitrage
§13.1Carry
Municipal bond tax arbitrage
Borrow money and buy tax-exempt municipal bonds. If the borrowing cost after the tax deduction is lower than the bond yield, the difference is profit. It only works for firms whose tax rules allow both the exemption and the interest deduction.
- Asset class
- Tax arbitrage
- Held for
- Years
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Municipal yield versus the after-tax loan rate.
- Entry and exit
- Borrow and buy; hold while the yield gap stays positive.
- Sizing
- Single position funded with debt.
How it fails
- Tax law changes
- Rate changes
- Credit risk of the issuer
Data it needs
- municipal bond yields
- loan rates
- tax rate
ARCANE has no tax data or loan rates; muni ETFs like MUB are only a loose proxy.
How ARCANE uses it
Not usable; it depends on the holder's tax position, not a market view.
Needs borrowing and tax inputs, not a signal.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §13.1, p. 103 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.