Longtime Minneapolis resident Jeffrey Steven Drobny splits his time between MN and Scottsdale, AZ. Jeff Drobny has spent his career in the financial services industry providing fixed-income investment strategies to his clients. Jeff Drobny’s two decades with Cargill taught him methods of isolating desired risks and mitigating undesired risks. One of the strategies he has employed to make a return on capital over his career is fixed-income arbitrage.
Fixed-income arbitrage relies on the concept of arbitrage or the fact that different segments of a market may value a product differently. Thus, one can buy the product where its price is lower and sell it where it is higher, thereby making a profit. In modern financial markets, arbitrage also can be the act of borrowing an asset at one rate of interest and then investing it at a higher rate of return.
Fixed-income arbitrage relies on financial instruments that guarantee a stream of income, examples of these are bonds issued by institutions, and credit default swaps. Credit default swaps are essentially insurance on a specific risk, such as the risk of a corporation defaulting. In the most common form of fixed-income arbitrage, the investor makes opposing bets on the value of a bond and the bond’s credit default swap, betting for example that the bond value is lower than market price, and credit default swap value is higher.