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.
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.
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.
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.
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.