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1、HarvardBusinessSchool9-293-093Rev.June28,19951ArbitrageintheGovernmentBondMarket?OnJanuary7,1991,SamanthaThompson,whoanalyzedandtradedgovernmentbondsforthefirmofMercerandAssociates,noticedwhatshethoughtweremajordiscrepanciesinthepricesofanumberoflong-maturityU.S.Treasurybo
2、nds.TheseapparentdiscrepanciesmightpermitMerceranditsclientstosubstitutesuperiorbondsforexistingholdings,andpocketapositivepricingdifferenceaswell.Herfirmcouldalsocapturearbitrageprofitsbytakingoffsettingpositionstotheextentthattheywereabletoestablishshortpositionsintheove
3、rpricedsecurities.WhatmadethisallegedarbitrageopportunitysounusualwasthatitexistedintheU.S.governmentbondmarket,thelargest,mostliquid,andcloselywatchedfixed-incomemarket.AsofDecember1990,theU.S.Treasuryhadalmost$2.2trillionofTreasurybills,notes,andbondsoutstanding.2Toputth
4、ismarket’smagnitudeinperspective,Treasuryobligationsoutstandingattheendof1990were1.8timesaslargeastotalU.S.corporatebondsoutstanding,3.2timesaslargeastotalbankloansoutstanding,and3.0timesaslargeastotalmunicipalbondsoutstanding.3Throughoutthe1980sandearly1990s,raisingTreasu
5、rydebtthroughthecapitalmarketsservedasthemechanismforfundingthelargebudgetdeficitsincurredbythefederalgovernment.TheTreasurymarketwassignificantnotonlyforitssize,butalsoforitsliquidity.Onanaverageday,approximately5%ofallgovernmentsecuritieschangedhands.4Incomparison,turnov
6、erintheNewYorkStockExchangein1990was46%fortheyear,orapproximately.2%perday.5Theclosely-watchedTreasurymarketwasanunlikelyplacetofindarbitrageopportunities.1Thiscasestudydescribesthesituationanalyzedintheworkingpaper,“NegativePutandCallPricesImplicitinCallableTreasuryBonds,
7、”byMichaelE.Edleson,DavidFehrandScottP.Mason.ThistopicisalsotreatedbyFrancisA.Longstaffin“AreNegativeOptionPricesPossible?TheCallableU.S.TreasuryBondPuzzle”JournalofBusiness65(October1992),pp.571-592.2ATreasurybillhasanoriginalmaturity(maturityatissue)oflessthanorequalto1y
8、ear,Treasurynoteshavematuritiesof2-10years,andTreasurybondshavematuritiesofgreaterthan10y
