Introduction to several arbitrage methods: Spread arbitrage operations are very helpful in improving the returns of fixed income investment portfolios.

Several common arbitrage strategies include: 1. Using 7-day positive repurchase financing while buying central bank bills or short-term financing bonds; 2. Using 7-day positive repo financing while subscribing for money market funds; 3. Central bank bills and short-term financing bonds

credit spread arbitrage.

Due to market liquidity, there are certain obstacles in the realization of credit spread arbitrage. However, with the continuous development and improvement of the bond market, the transaction costs of arbitrage operations will inevitably gradually decrease and the feasibility will gradually increase.

Arbitrage Strategy Profit and Loss Analysis Among several arbitrage methods, the method of using 7-day positive repurchase financing and subscribing for money market funds at the same time has relatively stable returns and relatively small risks; using the 7-day positive repo financing and simultaneously purchasing central bank bills or buying

The arbitrage methods of short-term financing bills are basically the same in terms of operation methods, but the liquidity of central bank bills is better than that of short-term financing bills, the credit risk is smaller than that of short-term financing, and the returns are also slightly lower.

Credit spread arbitrage has higher returns among several arbitrage methods. In addition, scenario analysis also shows that: assuming the spread remains unchanged, the return of this arbitrage operation increases when the yield curve moves upward.

Introduction to Several Arbitrage Methods The focus of this article is mainly on the existence of some arbitrage opportunities in the current market environment.

When market returns are generally low, appropriate use of arbitrage opportunities will help increase portfolio returns.

Although some of the arbitrage strategies discussed in this article are limited by market liquidity and have certain obstacles in actual operation, with the continuous development and improvement of the bond market, the transaction costs of arbitrage operations will inevitably gradually decrease and the feasibility will gradually increase.

·The arbitrage operation of using pledged positive repo financing and buying central bank bills at the same time. Judging from the current market interest rates, there is a relatively stable interest rate difference between the 7-day repo rate and the central bank bills; the 1Y central bank bills and the 7-day repo

The spread is about 50~55bp; the spread on 3M central bank bills and 7-day repurchase is about 35~40bp.

You can carry out 7-day positive repurchase to borrow funds on the trading day T, and use the borrowed funds to purchase central bank bills; sell central bank bills on the trading day T+7 to obtain funds, and use these funds to pay the principal and interest of the 7-day positive repo.

This method does not occupy funds, but it will occupy cash bonds. That is, when conducting positive repurchase financing on the trading day T, the arbitrage operator must hold cash bonds that can be used as collateral bonds.

·The arbitrage operation method of using pledged positive repo financing and buying short-term financing bonds at the same time is the same as above, except that short-term financing bonds are purchased on trading day T instead of central bank bills.

Since the yield of short-term financing bonds is higher than that of central bank bills of the same term, this method can obtain higher returns; however, it should be noted that the liquidity of short-term financing bonds is slightly worse than that of central bank bills, and the risk of arbitrage operations is correspondingly higher.

When conducting arbitrage operations, investors should choose short-term financing with high credit ratings and good liquidity.

In addition, the issuance interest rate of short-term financing bonds has increased significantly in 2006, and the secondary market yield of corresponding bond types has also increased significantly. The spread with the current repurchase interest rate is large, and it is more profitable to choose this type of bond for arbitrage operations.

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· Use pledged positive repurchase financing and subscribe for arbitrage operations of money market funds. Since the annualized rate of return of money market funds is relatively stable (the 7-day annualized rate of return of most money market funds is between 1.9% and 2.0%), it is different from

The 7-day positive repurchase interest rate spread is stable, and there are no subscription and redemption fees; the arbitrage return is relatively stable and the risk is relatively small.

However, it should be pointed out that when redeeming money market funds, there may be a gap of 2 to 3 working days between the date of fund arrival and the date of redemption application; and the fund manager has the right to reject or suspend fund investors' subscription applications.

Figure 1: Flowchart of arbitrage strategy between 7-day repurchase and central bank bills (short-term financing bills/subscription money market funds) Source: Guosen Securities Economic Research Institute·Credit spread arbitrage between central bank bills and short-term financing bills has similar maturities but is

Credit arbitrage opportunities exist between bonds with different credit ratings, such as short-term financing bonds and central bank bills with similar maturities.

Taking short-term financing bonds and central bank bills with a remaining term of about 1 year as an example, the interest rate spread is about 60bp; the following arbitrage operation can be constructed: on trading day T, a 7-day buyout reverse repurchase is carried out and integrated into the central bank bills, and the interest rate spread is immediately

The bought-in central bank bills are sold, and then the cash obtained from selling the central bank bills is used to purchase short-term financing bonds, and the short-term financing bonds are repurchased to cover the bond lending cost of the buyout reverse repurchase with the borrowed funds; if the above transaction

If all are completed within one day, basically no funds and cash coupons will be occupied.

On the trading day T+7, the outright reverse repurchase expires. Buy central bank bills, complete the outright reverse repurchase transaction, and obtain cash to cover the cost of buying central bank bills; the positive repurchase expires and the counterparty is paid.

Principal and interest, obtain short-term financing bonds, sell them immediately, and use the cash obtained to cover the principal and interest required to complete the repurchase transaction.

The arbitrage operation flow chart is as follows.