Strategies · Library · Fixed income
§5.15Pairs and relative value
Swap-spread arbitrage
A dollar-neutral trade between an interest rate swap and a Treasury of the same maturity. Profit depends on how the floating rate compares with the repo rate, effectively a bet on bank funding stress.
- Asset class
- Fixed income
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Swap fixed rate minus Treasury yield, versus floating minus repo
- Entry and exit
- Take long or short swap against the Treasury; hold.
- Sizing
- Equal dollar legs
How it fails
- Funding spikes
- Short leg
- Basis changes
Data it needs
- inputs ARCANE does not hold
Needs swaps and repo data.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Needs swaps and shorting.
Filed under the pairs and statistical arbitrage card
Find two securities whose prices moved together for a year. When the gap between them opens past two standard deviations, buy the laggard and sell the leader.
A paper plan from this card holds 5 to 126 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §5.15, p. 77 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.