What Are Off-The-Run Treasuries?
Let me explain off-the-run treasuries directly: they are all Treasury bonds and notes issued before the most recently issued one of a particular maturity.
You can contrast off-the-run treasuries with on-the-run treasuries, which are only the newest issues.
Key Takeaways
- Off-the-run treasuries refer to any Treasury security that has been issued, except for the newest issue, which are called on-the-run.
- Off-the-run treasuries tend to be somewhat less liquid than on-the-run securities, although they are still actively traded on the secondary market.
- The price difference between on-the-run and off-the-run Treasuries is often referred to as the liquidity premium, as the more liquid Treasuries are obtained at a higher cost.
Off-The-Run Treasuries Explained
When the U.S. Treasury issues securities like notes and bonds, it uses an auction process to set the price based on bids and interest levels. Once the auction closes, those new issues become on-the-run Treasuries. As soon as a new security of the same maturity comes out, the previous one shifts to off-the-run status.
For instance, if the U.S. Treasury issues 5-year notes in February, those are on-the-run, replacing any prior 5-year notes which then become off-the-run. Come March with another issuance, the March notes take the on-the-run spot, and February's join the off-the-run category. This cycle continues as new issues emerge.
Where to Trade Off-The-Run Treasuries
You can buy on-the-run Treasuries directly from Treasury Direct, but for off-the-run ones, you'll need to get them from other investors via the secondary market. Once they hit this over-the-counter market, they're traded less often because investors favor the liquidity of on-the-run options. To make off-the-run Treasuries more appealing, they're usually priced lower and offer a bit higher yield.
This setup creates a yield spread between off-the-run and on-the-run Treasuries, partly due to supply dynamics—on-the-run have a fixed supply with high demand driving up prices and lowering yields. Off-the-run securities often sit in portfolios until maturity since there's little incentive to trade them. In contrast, when managers adjust interest rate exposure or seek arbitrage, they turn to on-the-run Treasuries, boosting their liquidity.
Off-The-Run Yield Curves
While you could build an interpolated yield curve using on-the-run Treasury yields to price debt securities, some analysts opt for off-the-run yields instead. This choice comes into play when on-the-run demand fluctuates inconsistently, leading to price distortions. By basing the yield curve on off-the-run rates, you avoid letting temporary demand shifts skew calculations or fixed income pricing.
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