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Douglas Schiz (Edison, N.J.), a sophomore economics and business major, is exploring an unusual way to make money in the U.S. treasury bond market and is investigating arbitrage profits reaped at rare times when the yield curve is inverted.
Arbitrage profits involve buying and selling at the same or nearly the same time using someone else’s money, says Philip Shively, assistant professor of economics and business. Schiz, who began his research over the January interim session between semesters, is working with Shively as an EXCEL Scholar.
“Inverted yield curves are characterized by short-term interest rates being higher than long-term interest rates,” says Schiz. “The price of a government bond is determined by the yield rate. The higher the yield, the lower the price. We want to see if there are opportunities to obtain an abnormally large return on an investment of a treasury if bought during a time of inverted yield curve.”
Typically, a short-term bond would have a lower yield than a longer-term one, Shively explains, but “every now and then, the Fed jacks up short-term interest rates.”
“We want to know if you can make an arbitrage profit when you buy them at inverted rates and sell after they go back to normal,” says Shively, adding that some Wall Street firms are continually on the lookout for such abnormal profits. “It seems too good to be true.”
He describes the project as in its early stages and Schiz, as a sophomore, in the learning process as he launches a literature search to see what others have written about the subject.
“He’s a really bright guy,” Shively says of his student. “I have high hopes for him. He’s going to learn a lot about finance and not only what you’d learn from a book. He’ll be going out and applying that knowledge, gaining a really solid understanding of the financial principles behind the bond market.”
Schiz says he enjoys learning about the bond market, which he previously knew nothing about.
A graduate of J.P. Stevens High School, he is treasurer of College Republicans and a member of the Investment Club. Over the interim session, he participated in the alumni externship program, shadowing Mike Maorino, president of Fleet Capital Corporation, Cranford, N.J.