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What is On-the-run Treasury?

Updated on April 9, 2024 , 1441 views

On-the-run treasury refers to the recently issued US Bonds. As it is the most recent form of the Treasury bond, it goes without saying that on-the-run treasury has a higher demand than other forms of securities that are associated with a specific maturity period. Besides, these securities happen to have high liquidity as compared to off-the-run security. That’s one of the reasons why these securities are purchased and sold at a premium.

On-the-run Treasury

As compared to the off-the-run counterparts, on-the-run Treasury notes have lower yields. Most investors take the price differences between these two investment instruments to their advantage when making an investment. Here’s how they use the price differences:

  1. Find a buyer for on-the-run security. They usually don’t keep these securities for long.
  2. Use the profits they earn from the sale of on-the-run security to buy their first off-the-run Treasury bond
  3. Keep off-the-run security for quite a few months
  4. Close the transaction by liquidating off-the-run treasury bonds
  5. Repeat the transactions

Since treasury bonds and notes are held and issued by the government of the United States, they are considered to be a whole lot safer than other types of investment instruments. Note that on-the-run treasury comes with a specific maturity period. As soon as the security expires, it turns into an off-the-run treasury. There is a high demand for on-the-run securities because of their high liquidity. That being said, finding a buyer for such types of treasuries isn’t difficult. That means it is easier for the seller to sell on-the-run securities faster than other securities. However, this doesn’t give the best yields.

Investors who are not concerned about the liquidity risks associated with this investment opt for off-the-run securities as they generate higher yields.

Understanding On-the-run Treasuries

As discussed above, the buyer can keep these securities for several months. The longer they wait, the higher the profits they make from trading these securities. Sellers use the arbitrage strategy to make enough money from the sale of the off-the-run treasuries. They short sell the on-the-run securities and use this money to purchase the off-the-run counterparts.

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They hold these treasuries for more than 3 months and sell them at a higher price to generate the best yields. These types of notes and bonds are issued by the US Treasury in order to finance the regular government expenses. This makes it the debt that the federal government owes to the investors.

With that being said, it is quite unlikely for the investors to suffer a loss with these securities. They are safe, however, these investment instruments cannot generate significant profits overnight. US Treasury issues new securities every now and then. The treasuries that are issued recently or the latest batch of these securities are known as on-the-run securities. For example, if the US treasury issues a new set of treasuries today, then it will be considered as on-the-run treasuries. If another batch of treasuries is released in the next month, then that will become on-the-run treasuries.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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