Off-The-Run Treasury Yield Curve

What Is Off-The-Run Treasury Yield Curve?

Off-the-run treasury yield curve graphically depicts the maturities and yields of U.S. Treasury securities that were issued prior to the most recent issuance.

Understanding Off-The-Run Treasury Yield Curve

Off-the-run Treasuries refer to U.S. government bonds of a given maturity that are not the most recently issued. A government bond is a debt security issued to support government spending. Federal government bonds in the United States include savings bonds, Treasury bonds (T-bonds), and Treasury inflation-protected securities (TIPS). 

Off-the-run means that they are not part of the most recently issued treasuries, which are called on-the-run treasuries and the corresponding yield curve is termed on-the-run treasury yield curve. A yield curve is important because it actually determines a benchmark for pricing bonds.

On-the-run treasuries are prone to price distortions caused by the fluctuations in current demand. Off-the-run treasuries are particularly useful as their yields are more stable than their newer brethren, thus the off-the-run treasury yield curve tends to smooth the distortions inherent in the on-the-run treasury yield curve.

On-the-run treasuries are the most actively traded Treasury securities. They are estimated to account for more than half of daily trading volumes. However, they still actually make up less than 5 percent of outstanding marketable Treasury securities. The rest of the Treasury debt is known as off-the-run Treasuries. The difference between the amount of on-the-run and off-the-run securities can also influence the pricing between the two securities.

Off-The-Run Treasury Yield Curve Example

The on-the-run treasury yield curve is the primary benchmark used for pricing fixed-income securities. However, fixed-income analytics—run by investors and traders—use a basis of the off-the-run Treasury yield curve. These investors believe the on-the-run treasury yield curve has price distortions caused by current market demand for the on-the-run bonds. 

To picture how the off-the-run Treasury yield curve works, think of a timeline when the U.S. Treasury issues bonds. When 10-year bonds are first issued in January of a year, those bonds are considered "on-the-run" Treasuries. This status is because they are most relevant or the latest edition. But later during the year, if the U.S. Treasury should release a new batch of 10-year bonds, the new batch becomes the on-the-run issue, and the January batch becomes the off-the-run Treasuries. The yield curve is then calculated using only the Treasuries that are off-the-run.