{“main”:"# Mastering the On-The-Run Treasury Yield Curve
The on-the-run Treasury yield curve graphically displays the current yields versus maturities of the most recently issued U.S. Treasury securities. As a primary benchmark, it plays a crucial role in the pricing of fixed-income securities.
Key Takeaways
- The on-the-run Treasury yield curve represents current yields against maturities of the latest U.S. Treasury issuances, serving as a key pricing benchmark for fixed-income securities.
- Opposite to the on-the-run curve, the off-the-run Treasury yield curve consists of U.S. Treasuries from previous issues that are still outstanding.
- Due to fluctuating current demand, the on-the-run Treasury yield curve can sometimes show price distortions, making it less accurate than the off-the-run Treasury yield curve.
Understanding On-The-Run Treasury Yield Curve
In essence, the on-the-run treasury yield curve is derived from the most recently issued U.S. Treasuries. It plots these instruments’ yields, of similar quality, against their maturities. While the on-the-run curve contrasts with the off-the-run curve\u2014comprising earlier maturity securities not part of the latest auction\u2014its significance lies in its widespread use for pricing fixed-income securities configurations.
However, the on-the-run yield curve can sometimes experience price skewing by several basis points. When an on-the-run Treasury goes ‘on special,’ its price increases due to heightened demand from securities dealers seeking it for hedging purposes. This scenario might introduce inaccuracies into the on-the-run Treasury yield curve.
The yield curve’s shape unveils two complications in the maturity-yield relationship:
- Yield Distortion: On-the-run issues can benefit from cheaper financing rates, thus presenting lower yields than they would without this advantage.
- Reinvestment Risk: Different risk levels between on-the-run and off-the-run issues regarding interest rate reinvestment also skew the yield curve.
Yield Curve Shapes
Typically, the on-the-run Treasury yield curve manifests an upward slope, known as a normal yield curve, where yield increases with maturity. This shape results from the interplay of supply and demand within different segments of the curve.
Consider, for instance, an investment fund focusing on 5- to 10-year maturities. The increased demand within this interval raises prices and lowers yields. Conversely, spectacular short-term investment demand steepens the yield curve.
An inverted yield curve, signifying higher interest rates for shorter than longer durations, might stem from aggressive central bank policies aimed at tempering economic growth. This is usually an aberration, with expectations for the curve to normalize to a flat or positive structure shortly thereafter.
A flat yield curve, where short- and long-term rates are nearly equal, often signals a transitional phase\u2014typically an adjustment from normal to inverted yield curves or vice versa.
Master the art of reading and leveraging the on-the-run Treasury yield curve to enrich your investment strategies!
Related Terms: U.S. Treasury securities, off-the-run Treasury yield curve, fixed-income securities, yield curve shapes, basis points.
