What Is Off-The-Run Treasury Yield Curve?

An off-the-run Treasury yield curve is the U.S. Treasury yield curve derived from the maturities, prices, and yields of Treasury bills or notes which are not part of the most recently-issued Treasury securities. Because they are not part of the most recently-issued treasuries, they are called off-the-run treasuries.

A yield curve is important because it actually determines a benchmark for pricing bonds.

Understanding Off-The-Run Treasury Yield Curve

Off-the-run Treasuries refer to U.S. government bonds of a given maturity, which 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 treasuries can be useful to construct a yield curve when there is a problem, or distortion, with the yield curve as represented by on-the-run treasuries.

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 five 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.

An Example of the Off-The-Run Treasury Yield Curve

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.