No arbitrage: New rules make markets 'less efficient'

Indexes may be less effective hedges in absence of arbitrageurs

risk-0914-lead-story-illo

It's the free lunch Wall Street can no longer stomach. In August, analysts at Bank of America Merrill Lynch argued CMBX indexes were becoming "glaringly cheap" as yield-hungry real-money investors snapped up the commercial mortgage-backed securities they reference. For one version of the index, referencing 2012 vintage deals, the bonds tightened 135 basis points between the start of 2014 and the end of July, while the index itself narrowed about half as much, causing a 70bp basis to open up b