Key Takeaways
- Newest U.S. Treasury securities with highest liquidity.
- Trade at lower yields due to liquidity premium.
- Serve as benchmarks for their specific maturities.
- Issued via auctions until replaced by next issue.
What is On-the-Run Treasury?
On-the-run Treasury securities are the most recently issued U.S. Treasury notes, bonds, or bills of a particular maturity, serving as the current benchmark in the fixed income market. These securities are highly traded and reflect the latest pricing and interest rate environment, making them key references for investors seeking a safe haven investment.
They contrast with off-the-run Treasuries, which are older issues of the same maturity and typically trade with wider spreads and less liquidity.
Key Characteristics
On-the-run Treasuries exhibit several defining features important for investors and traders:
- High Liquidity: These securities trade with narrow bid-ask spreads, allowing for efficient, large volume transactions.
- Benchmark Pricing: On-the-run issues set the standard for pricing their maturity segment, often included in major bond indices like BND.
- Lower Yields: Due to their liquidity premium, on-the-run Treasuries usually offer slightly lower yields compared to off-the-run counterparts.
- Auction Issuance: They are issued through U.S. Treasury auctions and retain their status until superseded by newer issues.
- Preferred by Institutions: Large investors use these for portfolio laddering and quick market access.
How It Works
When the U.S. Treasury issues a new security, that issue becomes the on-the-run bond for its maturity until the next auction. This status ensures it has the highest demand, resulting in a liquid market and tight pricing spreads. You can leverage this liquidity to enter or exit positions more efficiently than with older, off-the-run securities.
On-the-run Treasuries also serve as benchmarks for pricing derivatives and other fixed income products, influencing yields across the bond market. Their liquidity premium reflects investor willingness to accept lower yields for ease of trading, a dynamic that can shift during periods of market stress or volatility.
Examples and Use Cases
On-the-run Treasuries are widely utilized in various investment strategies and market applications:
- Portfolio Laddering: Investors may build a bond ladder incorporating on-the-run issues to manage duration and reinvestment risk efficiently.
- Benchmarking: Funds tracking the latest Treasury yields often include on-the-run securities, as seen in popular bond ETFs.
- Institutional Trading: Large firms like Delta rely on the liquidity of on-the-run Treasuries for managing their obligations and hedging interest rate risk.
Important Considerations
While on-the-run Treasuries provide superior liquidity and serve as market benchmarks, their slightly lower yields may deter yield-focused investors. Off-the-run Treasuries can offer higher returns but come with wider spreads and less trading activity.
Understanding the trade-offs between liquidity and yield is essential, especially if you are managing large positions or seeking quick conversion to cash. Incorporating on-the-run Treasuries into your strategy can enhance portfolio flexibility while maintaining exposure to core government debt instruments.
Final Words
On-the-run Treasuries offer superior liquidity and serve as key benchmarks, though they typically yield slightly less than off-the-run issues. Consider monitoring auction schedules and yield spreads to decide when these securities best fit your portfolio strategy.
Frequently Asked Questions
An On-the-Run Treasury is the most recently issued U.S. Treasury security of a specific maturity, such as a bond, note, or bill. It serves as the current benchmark with the highest liquidity and trading volume in the market.
On-the-Run Treasuries are the newest issues and trade with higher liquidity and narrower bid-ask spreads, while Off-the-Run Treasuries are older issues that typically have lower trading volumes and higher yields due to wider spreads.
Investors prefer On-the-Run Treasuries because they offer superior liquidity, allowing for large trades with minimal price impact. This makes them ideal for institutions needing quick cash conversion and safer entry and exit points.
The liquidity premium refers to the slightly lower yields investors accept on On-the-Run Treasuries compared to Off-the-Run ones, as a tradeoff for better liquidity. This yield gap tends to widen during periods of market stress.
On-the-Run Treasuries are issued via U.S. Treasury auctions to sophisticated buyers. They remain 'on-the-run' until the next auction for the same maturity issues a new security that replaces them as the current benchmark.
A newly auctioned 30-year Treasury bond is considered On-the-Run until the next 30-year bond auction. Similarly, the most recent 2-year note or 5-year credit default swap contract are also examples of On-the-Run securities.
Traders often buy On-the-Run Treasuries for their liquidity and safety, especially in volatile markets. Another strategy is the convergence trade, where investors buy cheaper Off-the-Run securities and sell On-the-Run ones, expecting prices to converge over time.
