Off the Run Treasury

Off the run Treasury definition


Off the run Treasury bills, notes, bonds are U.S treasury securities of various maturities that were issued at any time previous to the most recent issue of those maturities. For instance, when the U.S. Treasury Department releases the latest one-year Treasury note, that note will be referred to as the on the run Treasury, while all previous issues of the one-year Treasury note will become off the run Treasury securities. Off the run Treasury securities typically sell for less than on the run issues due to lessened liquidity and lower demand; in many cases, off the run Treasuries offer a higher yield in order to compensate for the reduced liquidity they provide.

How off the run Treasury securities work


At periodic intervals the U.S. Treasury holds securities auctions at which the prices of specific Treasury bonds and notes are determined; investors bid on the specific bonds and notes and the overall price is determined based on the bids received and the overall amount of demand for the particular securities. The securities issued at the conclusion of these auctions are known as on the run Treasuries, since they constitute the results of the currently on the run Treasury auction. All previous securities of the same maturity are then considered to be off-the-run Treasury securities and are no longer directly available from the Treasury Department; instead, they must be obtained from secondary markets and other investors.

Off the run Treasury prices


Because off the run Treasury securities are sold on a secondary over-the-counter market, off the run Treasury prices typically are less expensive and offer higher yields in order to attract buyers more readily. Off the run Treasuries are less liquid than the current issue; as a result, investors pay a premium price for the luxury of liquidity that on the run Treasury securities provide.

Off the run Treasury yield curve applications


In most cases, analysts and investment brokers use the on the run Treasury yield curve as a benchmark for determining the price of fixed income securities. However, in certain cases it is preferable to use the off the run Treasury yield curve prices rather than the most currently issued Treasury securities as a basis for calculating the yield curve. This situation usually arises when the demand for on the run Treasuries is extremely high and that demand creates temporary price distortions. By deriving yield curve figures from the off the run Treasury prices rather than the current on the run Treasury issue, investment analysts can ensure that temporary fluctuations in demand do not skew the yield curve calculations or the pricing of fixed income investments.

Conclusions


For most investors, purchasing off the run Treasury securities on the secondary market can provide significant benefits as part of an overall investment portfolio. Risk-averse investors can achieve slightly higher returns on their investment by choosing off the run Treasuries rather than opting for the more popular current issues of Treasury securities.
Tim Ord
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