On-the-Run Treasury Yield Curve: What It Is and How It Works

Definition

The on-the-run Treasury yield curve plots yields against maturities using the most recently issued U.S. Treasury securities (the “on‑the‑run” issues). It serves as a primary benchmark for pricing fixed‑income securities and for market participants who need a quick read on current Treasury yields.

How it differs from off‑the‑run

On‑the‑run Treasuries are the newest issues; off‑the‑run Treasuries are older issues of the same maturity.
On‑the‑run yields are commonly quoted and used as benchmarks, but they can be less representative of the broader market because current demand for newly issued securities can distort prices and yields.
Off‑the‑run issues often reflect a more stable price/yield relationship and can be a better gauge of underlying supply/demand once issuance effects subside.

Why distortions occur

Dealer financing and special demand: Recent issues are frequently used by dealers for hedging and financing. When demand to hold or finance a particular on‑the‑run security rises, its price can be bid up and yield pushed down—sometimes by several basis points—when that issue goes “on special.”
Cheaper financing: On‑the‑run securities may be financed at more favorable rates, allowing buyers to accept lower yields than they otherwise would.
Reinvestment risk: On‑the‑run and off‑the‑run issues can differ in reinvestment timing and risk, affecting relative yields across the curve.

Common yield‑curve shapes and what they indicate

Normal (upward sloping): Longer maturities carry higher yields. Typical when investors expect positive growth and inflation over time.
Inverted: Shorter‑term rates exceed longer‑term rates. Often associated with tight monetary policy (higher short‑term rates) and market expectations of slowing growth or falling future rates; historically a warning sign for recessions.
Flat: Short‑ and long‑term yields are similar. May signal a transition between normal and inverted regimes or uncertainty about future rate direction.

What determines the curve’s shape

Relative supply and demand across maturities (buying activity for specific segments moves prices and yields).
Central bank policy, which directly affects short‑term rates.
Investor expectations for growth and inflation, which influence demand for long‑dated securities.

Practical implications for investors

Benchmarking and pricing: On‑the‑run yields are widely used for quoting and valuing bonds, but practitioners should be aware of potential distortions in specific maturities.
Hedging and trading: Dealers and hedge funds often prefer on‑the‑run issues for liquidity and standardized hedging, which can create temporary anomalies.
Portfolio construction: Consider both on‑ and off‑the‑run markets when assessing fair value, execution costs, and reinvestment risk.

Key takeaways

The on‑the‑run Treasury yield curve reflects yields of the most recently issued Treasuries and is a common market benchmark.
It can be skewed by dealer financing, hedging demand, and issuance effects, making off‑the‑run yields sometimes more representative.
Curve shape—normal, inverted, or flat—signals market expectations about growth, inflation, and monetary policy, and should be interpreted with awareness of on‑the‑run distortions.