Fixed-Income Arbitrage

One bond of Triple-B level risk pays 6% interest; another almost identical-risk bond pays 6.3% risk. The fixed income or bond arbitrage then is an "easy" process, wherein the arbitrageur shorts or sells the lower interest rate bond and buys the higher interest rate one, making a "riskless" gain of 0.3% per year in interest.

In shorting the lower interest or lower yielding bond, the short seller usually incurs a "borrow," or interest costs on that short; call it 0.1%. So the total arbitrage spread is something like 0.2%. And while that's a tiny number, on a billion dollars' worth of bonds for a decade or two, it adds up to nice, easy money.