how on the run treasuries work
the on the run bond or note is the most frequently traded treasury security of its maturity because on the run issues are the most liquid they typically trade at a slight premium and thus yield a little less than their off the run counterparts some traders successfully exploit this price differential through an arbitrage strategy that involves selling or going short on the run treasuries and buying off the run treasuries treasuries are considered to be a lower risk than some other investment options as they are debts owed by the federal government the treasury issues them to raise revenue for government expenses as treasuries are created and sold the newest batch becomes the on the run treasuries on the run vs off the run treasuriesa treasury transitions from on the run to off the run once a newer set of treasuries is released for sale for example if one year treasury notes are issued today those would be the current on the run treasuries if another set of treasury notes get issued in the next month those become the new on the run treasuries and the previously issued treasuries are considered off the run this cycle continues as each new batch is created with every group other than the newest run deemed off the run for the rest of its associated time until it is cashed in upon reaching maturity the most actively traded treasuries at any point in time are those that are considered on the run due to the increased activity they tend to have a higher initial cost and lower yield than off the run notes this causes on the run treasuries to be more liquid as finding a buyer tends to be simpler than off the run options this leads to more investments relating to hedging than to longer term investments long term investors do not need to purchase on the run treasuries at a higher price since the included return or interest rates tend to be similar the price difference between on the run and off the run treasuries is often referred to as the liquidity premium as the more liquid treasuries are obtained at a higher cost if liquidity is not a concern the investor will likely look for more cost effective options advantages and disadvantages of on the run treasurieson the run treasuries are more scarce than off the run treasuries there are plenty of off the run treasuries yet there are a limited amount of on the run securities that is new issues are a small part of the treasury universe thus on the run securities tend to have higher prices and lower yields on the run securities tend to be highly liquid as they trade heavily on the secondary market meanwhile the liquidity for off the run treasuries is less where they ve already been bought and are held by investors thus on the run treasuries trade with that liquidity premium but if investors don t need the newest issue they will likely find a better deal with off the run treasuries 