What is 'On-The-Run Treasury Yield Curve'

The on-the-run treasury yield curve is the U.S. Treasury yield curve derived using on-the-run Treasuries. The on-the-run Treasury yield curve plots the yields of bonds, of similar quality, against their maturities. It is the primary benchmark used in pricing fixed-income securities. The on-the-run Treasury yield curve is the opposite of the off-the-run Treasury yield curve, which refers to U.S. government bonds of a given maturity which are not part of the most recent issue of Treasury securities.

BREAKING DOWN 'On-The-Run Treasury Yield Curve'

The on-the-run Treasury yield curve is typically used to price fixed-income securities. However, its shape is sometimes distorted by up to several basis points if an on-the-run Treasury goes "on special." A Treasury goes "on special" when its price is temporarily bid up. This price increase is usually as the result of increased demand by securities dealers wishing to use the security as a hedging vehicle. This hedging can make on-the-run Treasury yield curves somewhat less accurate than off-the-run Treasury yield curves.

The Treasury yield curve indicates that there are two important factors that complicate the relationship between maturity and yield. 

  1. The first is that the yield for on-the-run issues is distorted since these securities can be financed at cheaper rates, and therefore offer a lower yield than they would without this financing advantage. 
  2. The second is that on-the-run Treasury issues and off-the-run issues have different interest rate reinvestment risks.

On-The-Run Treasury Yield Curve Shapes

The typical shape for the on-the-run Treasury yield curve is upward sloping as yield increases with maturity, which is referred to as a normal yield curve. The shape of the yield curve is the result of supply and demand for investments in particular segments of the curve. 

For example, if an investment fund chooses to invest only in securities with 5- to 10-year maturities, that would raise prices and lower yields in the corresponding segment. If demand by short-term investors is extremely high, the yield curve will become steeper.

A negative yield curve reflects higher interest rates for shorter-term maturities than for longer-term maturities. An inversion in the yield curve can sometimes be the result of aggressive central bank policies. These policies temporarily raise short-term interest rates to slow the economy. However, this is considered to be a short-term abnormality and there is an expectation that the curve will revert to a flat or positive structure in the near term. 

A flat curve, with short- and long-term rates that are approximately equal, are normally associated with a transitional period. This period is when interest rates are moving from a positive yield curve to a negative curve or vice versa. For more on on-the-run Treasury yield curves, see Understanding the Treasury Yield Curve Rates.

  1. Interpolated Yield Curve - I Curve

    An interpolated yield curve (I curve) is a yield curve derived ...
  2. Off-The-Run Treasuries

    Off-the-run treasuries are all Treasury bonds and notes issued ...
  3. Yield Curve Risk

    The yield curve risk is the risk of experiencing an adverse shift ...
  4. Flat Yield Curve

    The flat yield curve is a yield curve in which there is little ...
  5. Yield Elbow

    The point on the yield curve indicating the year in which the ...
  6. Riding the Yield Curve

    Riding the Yield Curve is a trading strategy that involves buying ...
Related Articles
  1. Investing

    How Bond Market Pricing Works

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

    The impact of an inverted yield curve

    Understand how the relationship between short- and long-term interest rates contributes to an inverted yield curve – a noteworthy economic event.
  3. Investing

    A Flattening Yield Curve Is Good For The Economy and Stocks

    Wall Street is concerned because the yield curve is flattening, but that doesn't mean a recession is near.
  4. Investing

    The Importance Of U.S. Treasury Rates

    U.S. Treasury bond interest rates affect more than just bondholders! It impacts the day to day lives of all consumers.
  5. Insights

    Is a Recession Coming? Watch the Yield Curve

    The yield curve can be an indicator of which way the economy is heading.
  6. Investing

    Charles Schwab: Large-Cap Stocks Could Restart Their Outperformance

    Owing to a flattening of the yield curve, Charles Schwab said that large-cap stocks could outperform again.
  7. Insights

    Why the 10-Year U.S. Treasury Yield Matters

    10-year treasury bond yields are important indicators of the economy as a whole.
  8. Insights

    Four Scenarios: Fed Policy, the Yield Curve and Recessions

    If you were to compile a list of the most effective recession predictors, the term spread, or difference between short and long-term interest rates, would likely be at the top of that list.
  9. Insights

    Bank Stocks Set to Shine as Fed Tapering Begins

    As the Fed embarks on a monumental shift in policy, Goldman Sachs sees value in financials.
  1. What is the current yield curve and why is it important?

    Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... 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. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center