Fixed Income Relative Value
A relative-value strategy that exploits pricing discrepancies between related fixed-income instruments (e.g., on-the-run vs off-the-run Treasuries, swap-spread, asset-swap, basis trades) using high leverage and tight risk controls.
Details
- aliases: FI RV, Rates Relative Value
- category: relative-value
- investment thesis: Closely-related instruments occasionally diverge from no-arbitrage relationships due to flow imbalances, regulatory friction, or market segmentation; these spreads converge on a measurable schedule.
- edge source: Quantitative modeling, financing relationships (repo), regulatory arbitrage, and patient capital.
- typical holding period: 1 day to 2 years
- drawdown profile: Highly negative skew — LTCM blueprint. Dependence on stable financing means losses cluster in funding crises.
- correlation to equities: 0.1
- correlation to bonds: 0.2
- liquidity profile: monthly
- instruments used: government bonds, interest-rate swaps, repo, futures, swaptions
- asset classes: rates
- primary risks: repo financing risk, VaR-driven deleveraging, model risk, tail correlation
- key metrics: DV01, carry, roll-down, convexity-adjusted P&L
- notable practitioners: LTCM (historical), Capula, BlueCrest (former), Citadel Global Fixed Income
- exemplar funds: capula, millennium
- related terms: basis-trade, swap-spread, repo, on-the-run, convexity
- related strategies: global-macro, convertible-arbitrage
- academic foundations: Vasicek (1977), Heath-Jarrow-Morton (1992), Duffie & Singleton (1999)