[avvt4avaw]

For example, if the yield on a long-term bond is 3% and repo rates are only 2%, you might buy the bond, financed with a repo transaction, and bet that over the term of the repo, the bond’s price will hold up enough to allow you to profit from the transaction. If it is a one year repo, the bond could decline in price by 1% and you would still make a profit because its yield is higher than the cost to finance the purchase.

A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.