Which of the following best describes fixed income arbitrage?

Fixed income arbitrage involves taking advantage of price discrepancies between related fixed income securities. This strategy typically relies on interest rate movements and is centered around various interest rate-based trading strategies. Traders may exploit inefficiencies in the pricing of bonds, swaps, and other related instruments.

For instance, one might enter a long position in a bond while simultaneously shorting another bond with similar characteristics, anticipating that the yield spread will converge over time. This focus on interest rates and their fluctuations clearly aligns with the correct answer.

The other options do not encapsulate the essence of fixed income arbitrage. Long positions in equities only involve stock investments, which are outside the realm of fixed income. Investment in only government bonds is too narrow of a definition, as fixed income arbitrage can involve a wide variety of instruments including corporate bonds and mortgage-backed securities. Market-neutral equity strategies pertain to stocks and do not involve fixed income instruments, fundamentally differing from the strategies employed in fixed income arbitrage.