Unlocking the Power of On-the-Run Treasuries
On-the-run Treasuries represent the most recently issued U.S. Treasury bonds or notes within a specific maturity. These vital financial instruments stand in contrast to off-the-run Treasuries, which concern older, still existing issues. When media sources discuss Treasury yields and prices, they typically reference on-the-run Treasuries.
Key Takeaways
- On-the-run Treasuries are the newest Treasuries released for a certain maturity.
- Off-the-run Treasuries are older releases that remain outstanding.
- Treasuries transition from on-the-run to off-the-run when newer issues get released.
How the Latest Treasury Matters
On-the-run bonds or notes dominate the trading floor due to their frequent transactions and heightened liquidity. This abundant trading activity contributes to a nominal premium over off-the-run Treasuries, leading to slightly lower yields. Some traders leverage this difference for profits through an arbitrage strategy that entails short-selling on-the-run Treasuries and buying off-the-run ones.
Treasuries are generally deemed a safer investment compared to other options as they entail debts enforced by the U.S. Federal Government. They aim to generate revenue pivotal for government expenditures. As fresh Treasuries are issued and sold, these form the on-the-run Treasuries, marking them as the most recent and highly traded.
The Dynamic Cycle of Treasury Issuance
A Treasury morphs from on-the-run to off-the-run following subsequent issue releases. For instance, today’s issuance of one-year Treasury notes establishes these as the current on-the-run Treasuries. However, next month’s issuance would render these on-the-run Treasuries as off-the-run. This cycle continuously repeats, attending each new batch, demarcating all earlier batches as off-the-run until their maturity.
The most actively traded Treasuries are always the on-the-run ones. This availability leads them to commanding initial prices and lower yields compared to off-the-run notes. The augmented activity translates to higher liquidity, making it easier to find buyers for on-the-run securities over off-the-run options. This appeals mainly for hedging investments rather than long-term engagements.
Long-time investors might not need to purchase on-the-run Treasuries at elevated prices as overall returns are analogous. The price disparity between on-the-mortgage and off-the-mortgage Treasuries frequently gets dubbed the liquidity premium. Investors prioritizing economic efficiency look towards off-the-run options if liquidity isn’t their main concern.
Weighing the Pros and Cons
On-the-run Treasuries remain scarce compared to their off-the-run counterparts. Nevertheless, a limited count of on-the-run securities exists against a wider universe of older issues, leading to higher prices and—consequently—lower yields.
One significant merit lies in their considerable liquidity since they consistently trade robustly on secondary markets. Conversely, off-the-run securities provide less liquidity and often are embedded in investors’ holdings. Although bearing a liquidity premium, on-the-run Treasuries suggest moderate value if one doesn’t require the latest market issue. Opting for off-the-run Treasuries could unfold beneficial for some investors due to their relative affordability.
Related Terms: off-the-run Treasuries, Treasury yields, Treasury notes, bond investing, arbitrage.
