On-the-Run Treasuries Vs. Off-the-Run

The price and yield quotes for Treasury securities published both in the papers and online will note that the yields are for on-the-run Treasuries. These are the most recent issues of the different types of Treasury securities. If you want to buy Treasuries for your portfolio, comparing the on-the-run issue to off-the-run Treasuries may reward you with a little better yield.

Treasury Auction Schedules

The U.S. Treasury sells its bills, notes and bonds through an auction process. With almost $1 trillion of new debt issuance per year, there are auctions scheduled for Monday and Thursday every week. Most of the different types of Treasury securities have a new-issue auction at least once a month. After a Treasury security is auctioned and sold into the investment world, that specific issue becomes the on-the-run Treasury until the next auction for that issue rolls around.

On- vs. Off-the-Run Difference

It seems that there should be little difference between the rates of newly issue Treasuries and those already out in the markets, but instead there is usually a notable yield spread between on-the-run and off-the-run Treasuries that are in other aspects the same. The on-the-run Treasury will have a lower yield and higher price than a similar off-the-run issue. For example, from 1985 through 2005, the off-the-run 10-year Treasury note carried a yield ranging from 0.10 to as much as 0.50 percent higher than the on-the-run 10-year note.

Reasons for the Spread

Several reasons are often given for the higher prices/lower yields of on-the-run Treasuries. One is a matter of supply. While there are billions of dollars of each type of Treasury in circulation, the on-the-run issue will be of limited size, so buyer interest in the newest Treasury issue can push up the price. Also, the financial institution short-term trading of Treasuries for interest rate changes and arbitrage is primarily done with the on-the-run issues. Once a Treasury issue gets to off-the-run status, there is more of a buy-and-hold trading environment.

Buying Some Treasuries

As an informed investor who knows about the off-the-run yield advantage, make sure you ask your broker for yield quotes on several Treasury issues with the same maturity. Picking up 0.20 percent in yield on a 10-year Treasury is 2 full percent more interest over the term of the note.

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