Off-The-Run Treasuries

Off-the-run treasuries are all Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity. These are the opposite of on-the-run treasuries.

When the U.S. Treasury issues securities – Treasury notes, and bonds – it does so through an auction process to determine the price at which these debt instruments will be offered. Based on the bids received and the level of interest shown for the security, the U.S. Treasury is able to set a price for its debt securities. The new issues presented after the auction is closed are referred to as on-the-run Treasuries. Once a new Treasury security of any maturity is issued, the previously issued security with the same maturity becomes the off-the-run bond or note.

For example, if the U.S. Treasury newly issued 5-year notes in February, these notes are on-the-run and replace the previously issued 5-year notes, which become off-the run. In March, if another batch of 5-year bonds is issued, these March notes are on-the-run Treasuries and the February notes are now off-the-run. And so on.

While on-the-run Treasuries are available to be purchased from Treasury Direct, off-the run securities can only be obtained from other investors through the secondary market. When Treasuries move to the secondary over-the-counter market, they become less frequently traded as investors prefer to go for more liquid securities which is a characteristic of on-the-run Treasuries. To encourage investors to purchase these debt securities readily in the market, off-the run Treasuries are typically less expensive and carry a slightly greater yield.

Since off-the run Treasuries have a higher yield and lower price than on-the-run Treasuries, there is a notable yield spread between both offerings. One reason for the yield spread is the concept of supply. On-the-run Treasuries are typically issued with a fixed supply. The high demand for the limited securities pushes up their prices and, in turn, lowers the yield, causing a difference to ensue between the yields for on-the run and off-the run securities. In addition, off-the-run securities are mostly held to maturity in an asset manager’s portfolio as there’s not much reason to trade them. On the other hand, when portfolio managers need to shift their exposure to interest rate risk and find arbitrage opportunities, they trade on-the-run Treasuries, creating liquidity for these securities.

Although on-the-run treasury yield can be used to construct an interpolated yield curve, which is used to determine the price of debt securities, some analysts prefer to use the yield of off-the-run Treasuries to draw the yield curve. Off-the-run yields are used in cases where the demand for on-the-run Treasuries are inconsistent, thereby, causing price distortions caused by the fluctuating current demand. By deriving yield curve figures from the off-the-run Treasury rates, financial analysts can ensure that temporary fluctuations in demand do not skew the yield curve calculations or the pricing of fixed income investments.