What Are On-The-Run And Off-The-Run Securities?

The U.S. Treasury is the largest issuer of debt securities in the world.

It sells a variety of the following on a regularly scheduled basis throughout the year:

• Bills: Debt due in one year or less that come in 4, 13, 26, and 52-week maturity, sold once a week
• Notes: Debt due in one year to 10 years that come in two, three, five, seven, and ten-year maturities, sold every month
• Bonds: Debt due in 10 years or more that come in 30-year maturities, sold every month

As of August 2018, about US$20 trillion of U.S. Treasury debt is outstanding.

Newly issued Treasury securities are considered to be "on-the-run" while older securities already issued and outstanding are called "off-the-run." For example, when the Treasury sells 10-year notes, the new issue immediately becomes on-the-run, while all previous 10-year notes become off-the-run.

There is an important difference between the two that goes beyond simply distinguishing between newer and older issues. There is a yield differential between older and newer securities that investors can take advantage of, namely, off-the-run securities generally yield more than newer on-the-run issues.

Why Choose Off-The-Run Over On-The-Run?

The biggest reason is scarcity value.

There are trillions of dollars of Treasury securities already outstanding, so it stands to reason that a new issue will be a relatively small portion of the entire universe. As a result, the price of the new issue will generally be higher—and its yield lower—than previously issued securities of the same maturity.

On-the-run securities also are the most heavily traded in the secondary market, which is why the price and yield differential is known as the liquidity premium. Conversely, a good portion of previously issued off-the-run securities have already been bought and held by investors and therefore aren't available in the open market.

Unless the investor absolutely must, for some reason, have the most recently issued on-the-run security, he or she is usually better off buying an off-the-run issue. According to a 2017 study by the Federal Reserve Bank of San Francisco, the yield differential between on-the-run and off-the-run 10-year Treasuries has averaged 14 basis points.^[1]

Summary

"On-the-run" U.S. Treasury debt securities are the most recently issued of a particular maturity date, while the older ones are known as "off-the-run." Generally speaking, on-the-run securities tend to cost more—and yield less—than comparable seasoned securities due to their relative scarcity value and liquidity.