Unraveling the Essence of Fleeting Government Bonds: Crucial Characteristics and Dealing Strategies

In the world of U.S. government debt, there are two types of Treasuries that investors often encounter: on-the-run and off-the-run.

Treasuries are debts owed by the Federal Government and are issued to raise revenue for government expenses. The newest batch of Treasuries, freshly issued and sold, becomes the on-the-run Treasuries. As time passes and new Treasuries are issued, the current on-the-run Treasuries transition to off-the-run status.

On-the-run Treasuries are the most recently issued U.S. Treasury bonds or notes. They are the most frequently traded Treasury securities of their maturity and are highly liquid due to their frequent trading on the secondary market. This high liquidity makes on-the-run Treasuries more attractive to some investors, as they offer ease of transaction. However, this liquidity comes at a cost. On-the-run Treasuries trade at a premium due to their liquidity, resulting in a lower yield compared to off-the-run Treasuries.

Off-the-run Treasuries, on the other hand, have already been bought and held by investors. As a result, they have less liquidity compared to on-the-run Treasuries. This lower liquidity means that off-run Treasuries may be more difficult to buy or sell, but they often offer a higher yield due to the lower demand.

Investors seeking a balance between cost and liquidity may find off-the-run Treasuries to be a suitable option. Those who prioritize cost over liquidity should consider off-the-run options, as they offer a higher yield compared to on-the-run Treasuries.

The price difference between on-the-run and off-the-run Treasuries is often referred to as the liquidity premium. Investors can exploit this price difference through an arbitrage strategy, buying off-the-run Treasuries and selling on-the-run Treasuries simultaneously, profiting from the difference in price.

It is important to note that the most actively traded Treasuries are usually those considered on-the-run. Investors should be aware of this when making investment decisions, as the liquidity of a Treasury security can greatly impact its price and yield.

Unfortunately, data on which banks executed the most transactions with On-the-Run Treasuries in the past 12 months was not available at the time of this writing.

Overall, Treasuries are considered to be a lower risk than some other investment options, making them an attractive choice for many investors. Understanding the differences between on-the-run and off-the-run Treasuries can help investors make informed decisions when building their portfolios.