Key Takeaways
- Older U.S. Treasury issues, less liquid.
- Trade mainly OTC with wider spreads.
- Offer higher yields than on-the-run.
- Make up about 98% of Treasuries.
What is Off-the-Run Treasuries?
Off-the-run Treasuries are older U.S. government debt securities, such as bills, notes, or bonds, that are no longer the most recently issued for their maturity. Unlike on-the-run Treasuries, these securities trade with lower liquidity and typically offer higher yields as compensation for reduced market activity. Understanding their role as a significant part of the Treasury market can help you identify opportunities in fixed-income investments.
These securities remain backed by the U.S. government's full faith and credit, making them a safe-haven asset despite their secondary market status.
Key Characteristics
Off-the-run Treasuries exhibit distinct features compared to their on-the-run counterparts:
- Issuance Status: They are previous issues superseded by newer auctions but remain outstanding in the market.
- Liquidity: Lower trading volume and wider bid-ask spreads due to less frequent transactions, often conducted over-the-counter.
- Yield Profile: Typically offer higher yields to compensate investors for less liquidity and increased price volatility.
- Market Presence: Represent about 98% of Treasury securities outstanding, forming the bulk of U.S. government debt.
- Trading Venue: Mainly secondary market trading via dealers and brokers instead of direct auction platforms.
- Applicable Strategies: Often used in fixed-income laddering approaches to balance risk and return over time.
How It Works
When the U.S. Treasury issues new securities, they initially become on-the-run and serve as benchmarks with high demand and narrow spreads. Once a newer issue is auctioned, earlier securities shift to off-the-run status, leading to reduced liquidity and wider spreads. This dynamic creates a yield differential that benefits investors willing to accept less frequent trading.
Off-the-run Treasuries are primarily traded in the secondary market, where prices adjust based on supply, demand, and changing macroeconomic conditions. Their yield calculation relies on the annual coupon divided by the market price, often resulting in higher returns compared to on-the-run issues. Investors seeking steady income and moderate risk might consider supplementing their portfolios with these securities alongside popular options like the BND bond ETF.
Examples and Use Cases
Off-the-run Treasuries suit various investor profiles and scenarios:
- Long-term investors: Those looking for relatively higher yields with government-backed security may hold off-the-run notes as part of their buy-and-hold strategy.
- Corporate treasuries: Companies such as Delta may invest in these securities to balance liquidity needs with safe returns in their cash management.
- Portfolio diversification: Incorporating off-the-run Treasuries can complement equities and other assets, especially when guided by macroeconomics trends impacting interest rates.
- Fixed-income strategies: Laddering bond maturities with a mix of on- and off-the-run Treasuries helps manage reinvestment risk and cash flow timing.
Important Considerations
While off-the-run Treasuries provide generally safe returns, their lower liquidity can increase transaction costs and complicate quick sales. You should assess your investment horizon and tolerance for potential price volatility before allocating significant funds.
Additionally, understanding the impact of interest rate movements and macroeconomic policies is crucial, as these factors influence yield spreads and overall returns. For beginners, exploring resources like the best ETFs for beginners can provide a diversified exposure with less complexity.
Final Words
Off-the-run Treasuries provide higher yields but come with lower liquidity compared to the latest issues. Consider comparing their yields and trading costs against on-the-run Treasuries to determine if the premium justifies the trade-off for your portfolio.
Frequently Asked Questions
Off-the-Run Treasuries are U.S. government debt securities that are older issues and not the most recently auctioned for a specific maturity. They trade in the secondary market with lower liquidity compared to the newest "on-the-run" Treasuries.
On-the-Run Treasuries are the most recently issued securities for a given maturity and have high liquidity and lower yields. Off-the-Run Treasuries are older issues with lower trading volume, wider bid-ask spreads, and typically offer higher yields to compensate for reduced liquidity.
Off-the-Run Treasuries have lower liquidity and trade less frequently, so investors demand a higher yield as compensation for the increased difficulty in buying or selling them quickly. This yield difference is known as the liquidity premium.
A Treasury security becomes Off-the-Run once a newer security of the same maturity is auctioned. For example, a 3-year note is On-the-Run until the next 3-year auction, after which it transitions to Off-the-Run status.
Off-the-Run Treasuries primarily trade over-the-counter through dealers and brokers, often via phone-based transactions, rather than on electronic platforms. Their trading volume is much lower compared to On-the-Run Treasuries.
Off-the-Run Treasuries constitute about 98% of all outstanding Treasury securities and provide investors with opportunities to earn higher yields. They help maintain liquidity and depth in the Treasury market beyond the most recent issues.
No, both Off-the-Run and On-the-Run Treasuries are backed by the full faith and credit of the U.S. government, so the default risk is negligible regardless of issuance status.
