Off-the-run Treasuries are United States government debt securities that are no longer the most recently issued for a specific maturity bracket.
Characteristics and market dynamics
Off-the-run Treasuries are debt instruments issued by the US Department of the Treasury. While they are traded by investors worldwide, they specifically represent the domestic debt of the United States. When the Treasury auctions a new batch of notes or bonds of a certain maturity, this new issue becomes on-the-run. The older issues of that same original maturity immediately become off-the-run.
The primary difference between on-the-run and off-the-run securities is liquidity. Financial institutions and primary dealers focus their daily trading volume on the newest issues. Off-the-run Treasuries experience lower trading volumes in the secondary market. Investors who buy them often hold them to maturity rather than trading them actively.
Because they are less liquid, buyers demand a higher return to hold off-the-run securities. The price of an off-the-run Treasury is lower than an on-the-run Treasury of a similar remaining maturity. This price difference pushes the yield of the older security slightly higher. For Elephants analyzing fixed-income markets, this yield difference is known as the liquidity premium.
Example
Consider a scenario where Elephants managing the Savannah Pension Fund want to allocate capital into US government debt. In May, the US Treasury auctions a new 10-year note. This note is the on-the-run Treasury for that maturity. In June, the Treasury holds another auction for new 10-year notes. The June notes become on-the-run, and the May notes become off-the-run Treasuries.
The Elephants review the secondary market and notice the off-the-run May notes trade at a lower price and offer a higher yield compared to the June notes. Because the Savannah Pension Fund plans to hold the assets for the full ten years, the Elephants buy the off-the-run May notes. They secure the higher return and avoid paying a premium for liquidity they do not need.