On-the-run Treasuries are the most recently issued U.S. Treasury bonds or notes of a particular maturity. "On-the-run" Treasuries are the opposite of "off-the-run" Treasuries, which refer to Treasury securities that have been issued before the most recent issue and are still outstanding. Media mentions about Treasury yields and prices generally reference "on-the-run" Treasuries.
Breaking Down On-The-Run Treasuries
The on-the-run bond or note is the most frequently traded Treasury security of its maturity. Because on-the-run issues are the most liquid, they typically trade at a slight premium and therefore yield a little less than their off-the-run counterparts. Some traders successfully exploit this price differential through an arbitrage strategy that involves selling, or going short, on-the-run Treasuries and buying off-the-run Treasuries.
Treasuries are considered to be a lower risk than some other investment options, as they are debts owed by the Federal Government. The Treasury issues them to raise revenue for government expenses. As Treasuries are created and sold, the newest batch becomes the on-the-run Treasuries.
Transition From On-The-Run to Off-The-Run
A Treasury transitions from on-the-run to off-the-run once a newer set of Treasuries is released for sale. For example, if one-year Treasury notes are issued today, those would be the current on-the-run Treasuries. If another set of Treasury notes get issued in the next month, those become the new on-the-run Treasuries, and the previously issued Treasuries are considered off-the-run. This cycle continues as each new batch is created, with every group other than the newest run deemed off-the-run for the rest of its associated time, until it is cashed in upon reaching maturity.
Value Difference in On-The-Run and Off-The-Run Treasuries
The most actively traded Treasuries at any point in time are those that are considered on-the-run. Due to the increased activity, they tend to have a higher initial cost and lower yield than off-the-run notes. This causes on-the-run Treasuries to be more liquid, as finding a buyer tends to be simpler than off-the-run options. This leads to more investments relating to hedging than to longer-term investments.
Long-term investors do not need to purchase on-the-run Treasuries at a higher price since the included return or interest rates tend to be similar. The price difference between on-the-run and off-the-run Treasuries is often referred to as the liquidity premium, as the more liquid Treasuries are obtained at a higher cost. If liquidity is not a concern, the investor will likely look for more cost-effective options.