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On-the-Run Treasury

Definition

On-the-run Treasury refers to the most recently issued U.S. Treasury bonds or notes of a particular maturity. These securities tend to be the most liquid and actively traded, resulting in a tighter bid-ask spread. As a benchmark in the fixed-income market, they often have lower yields compared to off-the-run Treasuries, which are older issues with a similar maturity date.

Phonetic

The phonetic pronunciation for “On-the-Run Treasury” would be: “ɑn – ðə – rʌn ˈtrɛʒəri”

Key Takeaways

1. Definition and Trading: On the Run Treasuries refer to the most recently issued U.S. Treasury bonds or notes of a particular maturity. They are the most liquid, with the highest trading volume, which results in narrower bid-offer spreads and it’s easier to buy and sell them.

2. Yield and Pricing: On the Run Treasury yields are often used as a benchmark for other interest rates. The prices of on-the-run issues can represent the purest measure of market sentiment at a given point in time, as they are the most actively traded and tend to have the smallest bid-ask spread.

3. Risk and Return: As compared to the off-the-run treasuries, on-the-run treasuries offer lower yields because these are more liquid and carry lesser risks. These are often preferred by investors who value the liquidity and the risk-free nature of these securities.

Importance

On-the-Run Treasury is a crucial term in the business/finance sector because it pertains to the most recently issued government bonds or treasury securities. These securities are significant due to their high liquidity, large trading volume, and benchmark status for pricing other securities. When a bond is considered as “on-the-run,” it often signifies it’s in high demand, resulting in narrow bid-ask spreads, which makes it easier and less expensive for investors to trade. Additionally, they provide a risk-free rate of return, deemed practical for investors seeking safe investments. Thus, the On-the-Run Treasuries serve as a critical instrument for managing risk and setting financial standards in the global market.

Explanation

On-the-run Treasuries are the most recently issued U.S. Treasury bonds or notes of a particular maturity. They’re predominantly used as a benchmark in the financial market because of the high liquidity and low yield spreads associated with them. These characteristics are resultant of their high demand among investors and traders. Therefore, they provide a real-time snapshot of the market’s interpretation of the U.S. government’s credit risk, further allowing for a gauge to price other securities.

Moreover, the on-the-run Treasuries are also paramount to many strategies in the fixed income market. For instance, they’re heavily used in the repo market where they may be offered as collateral due to their creditworthiness. Furthermore, traders often engage in a practice known as Treasury arbitrage, leveraging the price discrepancies between the on-the-run and off-the-run Treasuries. In an unpredictable financial market, these securities stand as beacons of security and reliability. Their usage in everything from high-end trading strategies to standard risk measurements underlines their importance to the financial ecosystem.

Examples

“On-the-Run Treasury” is a term used to refer to the newest issue of a Treasury note or bond. These securities are the most heavily traded and, therefore, the most liquid. Here are three real-world examples related to this term:

1. U.S. Department of the Treasury Auctions: The U.S. Department of the Treasury regularly holds auctions to finance federal government operations. The most recent securities sold here, be it a Treasury note, Treasury bond, or Treasury bill, are referred to as ‘On-the-Run’ and are heavily traded post-auction due to their high liquidity.

2. Investment Decisions in Fund Management: Fund managers often prefer ‘On-the-Run’ securities due to their high liquidity, allowing for swift adjustments to their portfolios. For example, if a fund manager anticipates an economic change that would influence interest rates, they might use ‘On-the-Run’ Treasuries to quickly react.

3. Use in Financial Models: ‘On-the-Run’ Treasuries are often used as benchmarks in financial modeling, such as the calculation of credit spreads, due to their high liquidity and the frequency of trading. The yield of a corporate bond, for instance, might be compared to the yield of an ‘On-the-Run’ Treasury of similar maturity to establish the risk premium required by investors.

Frequently Asked Questions(FAQ)

What does the term On-the-Run Treasury refer to in finance?

On-the-Run Treasury refers to the most recently issued U.S. Treasury bonds or notes of a particular maturity. They are the most liquid and widely traded government bonds on the market.

Why are On-the-Run Treasuries more liquid than other treasury securities?

On-the-Run Treasuries are more liquid because they are in high demand among traders and investors due to their recent issue. They are often used as a benchmark for pricing other securities.

What’s the difference between On-the-Run and Off-the-Run Treasuries?

On-the-Run Treasuries refer to the most currently issued bonds or notes, hence they have more liquidity and are traded more often. Off-the-Run Treasuries are older issues that aren’t traded as frequently, and they typically offer a slightly higher yield due to their lower liquidity.

Does the higher liquidity of On-the-Run Treasuries affect their price?

Yes, generally the higher liquidity and demand of On-the-Run Treasuries result in slightly lower yields compared to Off-the-Run Treasuries, which affects their price.

Can individual investors buy On-the-Run Treasuries?

Yes, individual investors can buy On-the-Run Treasuries directly from the U.S. Treasury through the TreasuryDirect website, or indirectly through a broker.

How often are On-the-Run Treasuries issued?

The U.S. Treasury regularly issues bonds of various maturities. When a new issue is released, it becomes the On-the-Run Treasury for its maturity until the next issue is released.

Are On-the-Run Treasuries considered a safe investment?

Yes, all U.S. Treasury securities, including On-the-Run Treasuries, are backed by the full faith and credit of the U.S. government, making them one of the safest investments around.

Related Finance Terms

  • Secondary Market: This is where previously issued financial instruments, such as bonds, stock, etc., are bought and sold. The on-the-run treasury is the most recent issue of a government bond and is traded in the secondary market.
  • Off-the-Run Treasury: These are treasury bonds and notes that were issued before the most recent issue and are less frequently traded.
  • Yield Curve: On-the-run treasuries are often used to construct the treasury yield curve, which plots the yields of different treasury bonds with respect to their maturities.
  • Liquidity: On-the-run treasuries tend to be more liquid than off-the-run treasuries, implying that they can be sold quickly without impacting market price.
  • Treasury Auction: This is the process through which the U.S. Treasury sells new issues of treasury bonds or notes to the public. The most recently auctioned treasury is considered the on-the-run issue.

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