What are '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.

BREAKING DOWN 'Off-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.

RELATED TERMS
  1. On-The-Run Treasuries

    On-the-run treasuries are the most recently issued U.S. Treasury ...
  2. On-The-Run Treasury Yield Curve

    The on-the-run Treasury yield curve is derived from on-the-run ...
  3. Interpolated Yield Curve - I Curve

    An interpolated yield curve (I curve) is a yield curve derived ...
  4. Treasury Index

    The Treasury index is based on the U.S. Treasury's daily yield ...
  5. Treasury Note

    A treasury note is a marketable U.S. government debt security ...
  6. Federally Guaranteed Obligations

    Federally guaranteed obligations are debt securities issued by ...
Related Articles
  1. Investing

    Understanding Treasury Yield

    Treasury yield refers to the return on an investment in a U.S. government debt obligation, such as a bill, note or bond.
  2. Investing

    How Bond Market Pricing Works

    Want to know how bond price are determined? Learn the basic rule of the bond market.
  3. Investing

    Introduction to Treasury Securities

    Purchasing Treasury securities backed by the U.S. government and knowing their characteristics can provide a steady guaranteed income and peace of mind.
  4. Investing

    Long-Term Treasury Bond ETFs Are Attracting Assets in 2016 (TLT, TLH)

    Discover five exchange-traded funds that invest in U.S. Treasury long-term bonds and experienced large year-to-date capital inflows as of March 4, 2016.
  5. Investing

    The Treasury and the Federal Reserve

    Find out how these two agencies create policies to manage the economy and keep it on an even keel.
  6. Investing

    TLT: iShares Barclays 20+ Year Treasury Bond ETF

    Learn about the iShares 20+ Year Treasury Bond ETF (TLT). TLT is a very liquid ETF with low costs that allow investors to gain exposure to treasuries.
  7. Financial Advisor

    Get This: Bonds Beat Stocks After All

    Data shows that long-term Treasury securities have actually outperformed the S&P 500 over the past 10 years.
  8. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  9. Investing

    The 3 Largest U.S. Government ETFs (TIP, SHY)

    Learn about the benefits of U.S. government ETFs, and explore the three largest government funds available on the market as of March 2016.
RELATED FAQS
  1. Treasury Bond vs Treasury Note vs Treasury Bill

    Understand the types of securities the government issues. Learn the difference between Treasury notes (T-notes), Treasury ... Read Answer >>
  2. How is the interest rate on a treasury bond determined?

    Explore the difference between interest rates and bond coupons, what determines current yield on debt instruments, and why ... Read Answer >>
  3. Why do U.S. Treasury yields decrease in an emerging market crisis?

    Learn why you will often see the yields on Treasuries fall during a crisis in an emerging or foreign market. Find out about ... Read Answer >>
  4. What Is Treasury Stock?

    Find out about shares called treasury stocks that were once part of shares outstanding for a company, but have since been ... Read Answer >>
  5. What's the difference between bills, notes and bonds?

    Treasury bills (T-Bills), notes, and bonds are marketable securities that the U.S. government sells to pay off maturing debt ... Read Answer >>
Trading Center