Arbitraging TIPS
According to Thursday's Journal, the ask on an April 2028 inflation-protected bond (accrued principal of 1180 with a 3.625% coupon) was 135+25/32, and the bid on an April 2032 inflation-protected bond (accrued principal of 1075 with a 3.375% coupon) was 137+22/32. Buying $1000 of the former and shorting $1000 of the latter would yield a bit over $5/year and provide more than enough in April 2028 to cover the short (assuming we aren't in a period of hyper-inflation by then).

If you're a typical retail investor, and you don't get the proceeds of a short sale, the capital costs will exceed the proceeds. But if you could make the trade without tying up capital, it would be pretty neat. I do wonder how sensitive to volume the prices are — the spreads are only 1/32 for each security, which suggests but doesn't require a certain amount of liquidity. It may just not be worth the big guys' trouble. Or maybe I'm mis-reading the table.
- posted by Steven @ 12:35 PM