Off-the-Run Treasuries

Off-the-Run Treasuries: What They Are and Why They Matter

Key takeaways
* Off-the-run Treasuries are previously issued U.S. Treasury notes or bonds that have been superseded by a newer issue of the same maturity (the on-the-run issue).
* They are generally less liquid than on-the-run securities and typically trade at slightly lower prices and higher yields — the difference often described as a liquidity premium.
* Analysts sometimes use off-the-run yields to construct cleaner yield curves because on-the-run prices can be distorted by temporary demand swings.

What are off-the-run Treasuries?
Off-the-run Treasuries are Treasury securities that are not the most recently issued (on-the-run) issue for a given maturity. When the U.S. Treasury issues a new note or bond via auction, that new issue becomes the on-the-run security; the previous issue of the same maturity becomes off-the-run.

Example: If a new 5‑year note is auctioned in February, that issue is on-the-run. When a new 5‑year issue is auctioned in March, the March issue becomes on-the-run and the February issue moves to off-the-run status.

How they are traded
* On-the-run Treasuries can be purchased directly from the Treasury at auction or via TreasuryDirect when available.
* Off-the-run securities are obtained only in the secondary (over‑the‑counter) market from other investors. They remain actively traded but typically less frequently than on-the-run issues.

Why off-the-run yields differ from on-the-run yields
Several factors explain the typical yield spread between on-the-run and off-the-run Treasuries:
* Liquidity premium: On-the-run issues are more liquid and in higher demand (often because they are used for trading, hedging, and arbitrage). Investors are willing to pay more for that liquidity, pushing prices up and yields down. Off-the-run issues trade at a discount, producing higher yields.
* Fixed supply of new issues: Each on-the-run auction creates a limited supply of that most recent issue. Strong demand for the limited supply increases its price relative to older issues.
* Investor behavior: Portfolio managers frequently trade on-the-run securities when adjusting duration or exploiting arbitrage opportunities, while off-the-run securities are more often held to maturity, reducing turnover.

Use in yield curve construction
* On-the-run yields can sometimes be affected by short-term demand and liquidity effects, which can distort yield-curve estimation.
* Analysts may prefer off-the-run yields when constructing a yield curve to reduce the impact of temporary demand-driven price anomalies, producing a smoother, more representative curve for pricing and risk analysis.

Investment considerations
Pros
* Higher yields compared with the equivalent on-the-run issue.
* Potentially attractive for buy-and-hold investors seeking yield or for relative-value trades.

Cons
* Lower liquidity can mean wider bid-ask spreads and larger price impact for sizable trades.
* Secondary-market availability — you must buy from another investor rather than directly from the Treasury.

Conclusion
Off-the-run Treasuries are a common and important part of the U.S. government bond market. They typically offer a small yield premium over the most recently issued (on-the-run) securities in exchange for lower liquidity. For investors and analysts, off-the-run issues provide opportunities for higher yield and for constructing less distorted yield curves, but they require attention to liquidity and execution costs.