Off-the-run Treasuries refer to debt instruments issued by the US Treasury that are not the latest offering (of such debt instruments). Conversely, debt instruments issued by the US Treasury that are the latest offering (of such debt instruments) are known as on-the-run Treasuries.
The market for off-the-run Treasuries is the secondary market and comprises many buyers and many sellers. On the other hand, on-the-run treasuries are traded on the primary market, which is made up of many buyers but only one seller (the US Treasury).
Example of Off-the-Run Treasuries
Consider the following example:
On February 5, 2019, the US Treasury sold 3-year Treasury Notes to capital market investors. Until the next issue of 3-year Treasury Notes, the February 5, 2019 issue are on-the-run treasuries.
On March 11, 2019, the US Treasury once again sold 3-year Treasury Notes to capital market investors. After March 11, 2019, the February 5, 2019 issue of 3-year Treasury Notes became off-the-run treasuries. Until the next issue of 3-year notes, the March 11, 2019 issue will be on-the-run treasuries.
What are US Treasuries?
The US Treasury is the biggest issuer of debt in the world and as of August 2018, with close to $21 trillion in outstanding debt. It is in large part due to the dollarization of the world economy and the adoption of the view that the US dollar is the safest asset in the world.
Treasury bills are debt instruments where the debt must be repaid within 1 year (52 weeks).
Treasury notes are debt instruments where the debt must be repaid within 10 years.
Treasury bonds debt instruments where the debt must be repaid within 30 years.
Treasury bills come with 4-week, 13-week, 26-week, and 52-week maturities.
Treasury notes come with 2-year, 3-year, 5-year, 7-year, and 10-year maturities.
Treasury bonds come with 30-year maturities.
Treasury bills are sold once a week by the US Treasury.
Treasury notes are sold once a month by the US Treasury.
Treasury bonds are sold every month by the US Treasury.
Off-the-Run Treasuries vs. On-the-Run Treasuries
Off-the-run treasuries tend to offer higher yields than on-the-run treasuries because they cost less than on-the-run treasuries. It is due to the premium paid for the greater liquidity of on-the-run treasuries.
An investor can always purchase on-the-run treasuries from the US Treasury (i.e., the investor is guaranteed to find a willing seller), whereas an investor can only purchase off-the-run treasuries from other investors (i.e., the investor is not guaranteed to find a willing seller).
2. Trading frequency
Off-the-run treasuries are traded less frequently than on-the-run treasuries due to the liquidity premium (investors prefer to hold assets that are liquid). Therefore, in order to incentivize investors to purchase them, off-the-run treasuries cost less and provide higher yields. The difference in yields between the two types of treasuries is known as the yield spread.