As of December 2, 2008, the 30-year swap spread had been negative for a whole month. In particular, on that day, the 3-month repo rate was 0.5%, the LIBOR rate was 2.21%, the 30-year swap rate was 2.85%, and the semi-annually compounded yield-to-maturity of the 4.5% Treasury bond maturing on May 15, 2038 was 3.18%.
Is there an arbitrage? Discuss the swap spread trade that you would set up to take advantage of these rates.

Assuming that the U.S. government is less likely to default than swap dealers, how can you rationalize these rates? What risks would setting up this trade involve? Discuss. (Recall that there was an ongoing credit crisis).

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