Negative Arbitrage in Project Funds
Updated: Sep 4, 2019
by Sam Gruer
We recently completed a reinvest transaction for a Blue Rose client who had a rather short-dated project fund, with a final draw date approximately seven months after the settlement of the bonds. Given the current inversion of the yield curve at the very front end, we were delighted that we were able to achieve a gross yield of ~2.30%. This compared very favorably to the 1% yield offered by their current checking account in which they otherwise would have invested the project fund. The 2.30% portfolio yield also compared favorable to their arbitrage yield of 2.38%. In fact, we had discussions regarding the ramifications or structural requirements, if any, if we exceeded the arbitrage yield. Given the rapid draw schedule for this particular client, this ultimately was not a concern.
The graph below, shows US Treasury yields for monthly maturities up to two years. As is clearly shown, the highest yields are achieved with the shortest maturities.
For those clients who might assume that a shorter draw schedule might not warrant the effort and costs of a custom crafted reinvestment strategy, current market conditions suggest otherwise. Depending upon the principal balance to be invested and the strategy chosen, even after fees, investment returns in excess of 2.00% are realistically achievable. If you have or are anticipating un-invested bond proceeds in your project or construction funds, please contact your Blue Rose representative to discuss investment alternatives.
About the author:
Sam Gruer – Vice President
Sam joined the firm in June 2017. With more than 30 years of municipal market experience, Sam offers strategic recommendations to his clients based on thoughtful, sophisticated analysis. He is in our New Jersey office and is leader of the firm’s reinvestment business unit. Sam can be reached at email@example.com.