Understanding On-the-Run Treasuries: Key Features and Trading Tips

What are on-the-run Treasuries?

On-the-run Treasuries are the most recently issued U.S. Treasury notes or bonds of a given maturity. Because they are the newest issues, they are the most actively traded and therefore the most liquid. Market participants often reference on-the-run securities when quoting Treasury yields and prices.

How they work

• When the Treasury issues a new security (e.g., a 2‑year note), that issue becomes the on‑the‑run for its maturity.
• As newer issues are released, the previous on‑the‑run securities become off‑the‑run.
• On‑the‑run securities typically trade at slightly higher prices and correspondingly lower yields than off‑the‑run securities. This price differential is known as the liquidity premium.

On‑the‑run vs. off‑the‑run

• Liquidity: On‑the‑run securities are more liquid—buyers and sellers are easier to find—so traders and dealers prefer them for fast execution and hedging.
• Cost and yield: The liquidity premium means on‑the‑run Treasuries usually cost more and yield less than comparable off‑the‑run issues.
• Use cases: On‑the‑run Treasuries are favored for benchmarking, trading and hedging; off‑the‑run Treasuries can be more attractive for long‑term investors focused on total return and yield.

Trading considerations and strategies

• Liquidity premium arbitrage: Traders sometimes short on‑the‑run Treasuries and buy off‑the‑run Treasuries to exploit the price spread, aiming to profit if the spread narrows. This strategy involves execution, financing, and basis risks.
• Benchmarking: Because they’re the most quoted, on‑the‑run yields are often used as market benchmarks for interest rates and riskless rates in models.
• Hedging: Dealers and institutions use on‑the‑run issues for large, quick trades and to hedge positions because of their tight bid‑ask spreads and depth.

Pros and cons

Pros
– High liquidity and tight bid‑ask spreads.
– Widely quoted and accepted as market benchmarks.
– Useful for short‑term trading, hedging, and financing.

Cons
– Typically trade at a premium—lower yields than off‑the‑run equivalents.
– Scarcer relative to older issues, which may raise transaction costs for some strategies.
– Not necessarily the best choice for yield‑focused, buy‑and‑hold investors.

When to choose on‑the‑run vs. off‑the‑run

• Choose on‑the‑run if you need liquidity, frequent trading, quick execution, or use the security as a benchmark in pricing or hedging.
• Choose off‑the‑run if you prioritize higher yield and lower purchase price, and you do not require rapid tradability.

Bottom line

On‑the‑run Treasuries are the newest, most liquid U.S. government securities for a given maturity. They trade at a premium and yield slightly less than off‑the‑run issues because of their liquidity. Investors and traders should weigh the benefits of ease of transaction and benchmark status against the higher cost when deciding whether on‑the‑run or off‑the‑run Treasuries best fit their objectives.