What are ‘On-The-Run Treasuries’
On-the-run Treasuries are the most recently issued U.S. Treasury bonds or notes of a particular maturity. “On-the-run” Treasuries are the opposite of “off-the-run” Treasuries, which refer to Treasury securities that have been issued before the most recent issue and are still outstanding. Media mentions about Treasury yields and prices generally reference “on-the-run” Treasuries.
Explaining ‘On-The-Run Treasuries’
The on-the-run bond or note is the most frequently traded Treasury security of its maturity. Because on-the-run issues are the most liquid, they typically trade at a slight premium and therefore yield a little less than their off-the-run counterparts. Some traders successfully exploit this price differential through an arbitrage strategy that involves selling, or going short, on-the-run Treasuries and buying off-the-run Treasuries.
Understanding the Transition From On-the-Run to Off-the-Run
A Treasury transitions from on-the-run to off-the-run once a newer set of Treasuries is released for sale. For example, if one-year Treasury notes are issued today, those would be the current on-the-run Treasuries. If another set of Treasury notes get issued in the next month, those become the new on-the-run Treasuries, and the previously issued Treasuries are considered off-the-run. This cycle continues as each new batch is created, with every group other than the newest run considered off-the-run for the rest of its associated time, until it is cashed in upon reaching maturity.
Value Difference in On-the-Run and Off-the-Run Treasuries
The most actively traded Treasuries at any point in time are those that are considered on-the-run. Due to the increased activity, they tend to have a higher initial cost and lower yield than off-the-run notes. This causes on-the-run Treasuries to be more liquid, as finding a buyer tends to be simpler than off-the-run options. This leads to more investments relating to hedging than to longer-term investments.
Further Reading
- A Model of the Convenience Yields in On-the-run Treasuries – link.springer.com [PDF]
- Term structure estimation from on-the-run Treasuries – www.sciencedirect.com [PDF]
- Who makes on-the-run Treasuries special? – papers.ssrn.com [PDF]
- Who makes on-the-run Treasuries special? – www.sciencedirect.com [PDF]
- The on-the-run liquidity phenomenon – www.sciencedirect.com [PDF]
- The US Treasury yield curve: 1961 to the present – www.sciencedirect.com [PDF]
- The effect of transaction size on off-the-run Treasury prices – www.jstor.org [PDF]
- A search‐based theory of the on‐the‐run phenomenon – onlinelibrary.wiley.com [PDF]
- The price of future liquidity: Time-varying liquidity in the US Treasury market – academic.oup.com [PDF]
- Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply – www.sciencedirect.com [PDF]
