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  • Georgina Walleshauser

Benefits of Positive Arbitrage

Minneapolis, MN | November 9, 2023 | Georgina Walleshauser, Vice President

A significantly inverted treasury yield curve with elevated short-term rates continues to persist in the market. As a result, many issuers and conduit borrowers are finding the opportunity to earn positive arbitrage on their bond proceeds.

The Tax Reform Act of 1986 established arbitrage restrictions and rebate requirements for tax-exempt issuers and conduit borrowers of municipal bonds. These rules require tax-exempt borrowers to monitor the investment of their bond proceeds after a bond issuance. The burden of arbitrage rebate calculations and potential for rebate filings can become a deterrent to issuers when they are in a positive arbitrage situation. However, it is important to understand how and when positive arbitrage can be beneficial – especially in the current market environment.

In many instances, when positive arbitrage is earned on tax-exempt bond proceeds within the first three years, the issuer or conduit borrower will need to file an IRS Form 8038T and a rebate will be required to be paid back to the IRS to account for any investment earnings earned at a rate above the arbitrage yield. However, this rebate payment is not due immediately, but rather not for 5 years after the bonds close. Additionally, there are certain rebate exceptions that allow issuers and borrowers to earn and keep some or all of the positive arbitrage they earn. If a rebate payment is not due, there is no need for an IRS rebate filing.

One set of exceptions to paying arbitrage rebate relates to how quickly the bond proceeds and earnings are spent after closing. Below we outline the Arbitrage Rebate Spending Exceptions:

1. 6-Month Spending Exception

  • 100% of proceeds are spent within 6 months

2. 18-Month Spending Exception

  • 15% of proceeds are spent within 6 months

  • 60% of proceeds are spent within 12 months

  • 100% of proceeds are spent within 18 months

3. 2-year Spending Exception (75% construction issue)

  • 10% of proceeds are spent within 6 months

  • 45% of proceeds are spent within 12 months

  • 75% of proceeds are spent within 18 months

  • 100% of proceeds are spent within 24 months

As evidenced by the current treasury yield curve, the inverted yield curve reveals that interest rates are highest within the first two years of maturities. For issuers and borrowers coming to market with new money issuances for construction projects that will be completed within two years, they have potential to earn and possibly keep a significant amount of positive arbitrage earnings.

Of course, there are many factors to consider when evaluating reinvestment options and the potential for earning positive arbitrage. We strongly encourage all of our clients to dialogue with us about improving their plan of finance by considering the impact of investment earnings on borrowed dollars, all the more now with the potential for earning positive arbitrage. Further, engaging an arbitrage rebate specialist early on in the financing process, or soon after closing, especially if there is potential for earning positive arbitrage is also a good idea.

Current reinvestment rate indications are shown below. For a more tailored reinvestment indication to your specific fund(s) and a discussion of the risks and benefits to each type of reinvestment structure, please reach out to Georgina Walleshauser at


Georgina Walleshauser, Vice President | 952-746-6036 Georgina Walleshauser joined Blue Rose in 2017 as a Junior Quantitative Analyst. She has vast expertise in providing modeling, analytics, market data, and research in support of the delivery of capital planning, debt and derivatives advisory, and reinvestment services to our clients. As Vice President, she manages a number of the firm’s clients and ensures that transactions run smoothly through closing. She specializes in analyzing and assessing reinvestment strategies for clients, leading many of Blue Rose’s reinvestment transactions. Media Contact: Megan Roth, Marketing Manager 952-746-6056


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