On-the-Run Treasury
Candlefocus EditorBecause the yield and liquidity of the newest Treasuries is most attractive to market participants, on-the-run Treasuries tend to be the most actively traded. Their features make them a popular choice for investors who want stability and a predictable return.
The difference between on-the-run and off-the-run Treasuries lies in their liquidity. On-the-run Treasuries have the highest trading volumes, while off-the-run Treasuries tend to be more illiquid. This means that off-the-run Treasuries require more time to buy and sell, which can limit the nature of trading strategies. On-the-run Treasuries also tend to offer a higher return than off-the-run Treasuries, even with the same interest rate, maturity and coupon payment.
Trading on-the-run Treasuries in the secondary market can take the form of outright transactions or transactions of a derivatives nature, such as futures and options on Treasuries. Cash and cash-settled futures are employed to establish risk exposure in the underlying debt. Though illiquidity is a downside relative to cash securities, futures and options offer the ability to transfer exposure while keeping the investment principal intact.
On-the-run Treasuries are attractive investments as they have the potential to increase in value as the underlying interest rate decreases and vice versa. They are seen by many as a safe haven investment, offering low risk exposure and a guaranteed rate of return. Although they may not offer the highest return available, they offer predictability, liquidity and stability. As a result, they are widely used by institutional investors and individuals.