What Are On-the-Run Treasuries?
Let me explain on-the-run Treasuries to you directly: these are the most recently issued U.S. Treasury bonds or notes, and they're the ones that get traded the most because of their high liquidity. You'll notice they often come at a slight premium, meaning they trade at higher prices and offer lower yields compared to older, off-the-run versions. If you're an investor, you can use this liquidity premium in various trading strategies to make smarter decisions.
How They Differ from Off-the-Run Treasuries
On-the-run Treasuries stand apart from off-the-run ones, which are the securities issued earlier but still active. When you hear media reports on Treasury yields and prices, they're usually talking about the on-the-run ones.
Key Takeaways
- On-the-run Treasuries are the latest U.S. Treasury bonds or notes, more liquid than off-the-run counterparts.
- They trade at a premium with lower yields due to high liquidity and frequent trading.
- Investors use arbitrage by exploiting price differences between on-the-run and off-the-run Treasuries.
- New issues turn current on-the-run Treasuries into off-the-run status.
- Despite higher costs, they're ideal for liquidity seekers, while long-term investors might opt for cheaper off-the-run options.
Understanding the Mechanics of On-the-Run Treasuries
The on-the-run bond or note is the most traded Treasury security for its specific maturity. Because they're so liquid, they trade at a premium and yield less than off-the-run ones. Some traders take advantage of this by shorting on-the-run Treasuries and buying off-the-run ones in an arbitrage play.
Treasuries are low-risk investments since they're backed by the federal government, issued to fund expenses. When new ones come out, they become the on-the-run batch.
Comparing On-the-Run and Off-the-Run Treasuries
Treasuries shift from on-the-run to off-the-run when newer issues hit the market. For example, if one-year notes are issued today, they're on-the-run now, but next month's batch takes over, making the old ones off-the-run. This process repeats with each new issuance until maturity.
The most active trades happen with on-the-run Treasuries, leading to higher prices and lower yields. They're more liquid, so finding buyers is easier, which suits hedging strategies over long-term holds. If you're a long-term investor, you might skip the pricey on-the-run ones since returns are similar—the difference is just the liquidity premium. If liquidity isn't your priority, go for cheaper options.
Pros and Cons of Investing in On-the-Run Treasuries
On-the-run Treasuries are scarcer than off-the-run ones; new issues are just a small slice of the Treasury market, so they fetch higher prices and lower yields. They're highly liquid on the secondary market, unlike off-the-run ones that are often held long-term. This liquidity comes at a premium, but if you don't need the newest, off-the-run Treasuries offer better deals.
The Bottom Line
In summary, on-the-run Treasuries are the latest and most traded government debt for a given maturity, highly liquid but a bit more expensive with lower yields than off-the-run ones. If you value easy transactions and liquidity, they're worth the premium. But if cost matters more than quick trades, look at off-the-run options instead.
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