Off-The-Run Treasuries

What Are Off-The-Run Treasuries? 

Off-the-run treasuries are U.S. Treasury securities that were not recently auctioned. Unlike the regularly issued "on-the-run" treasuries, they are traded less frequently and often through phone-based transactions. Investors often take advantage of the yield differences between off-the-run and on-the-run treasuries.

On-the-run treasury securities are newly issued and have limited availability in the market. As a result, their prices tend to be higher and yields lower. In contrast, off-the-run treasuries, which have not been recently auctioned, typically have lower prices and higher yields. Analyzing and selecting investments based on these factors can help investors plan their finances and achieve their financial goals more effectively.

• Off-the-run treasuries are U.S. Treasury securities that were not recently auctioned. Traders engage in less frequent trading of these securities, often relying on phone-based transactions.
• Treasury securities are a good option for investors seeking low-risk and guaranteed returns.
• Off-the-run securities are generally less liquid than to on-the-run treasuries. Liquidity is an important factor to consider in investments, and the introduction of on-the-run treasuries can affect their prices and reduce yields.
• Treasury securities purchases occur directly from the U.S. government's website through auctions.

Off-The-Run Treasuries Explained  

Off-the-run treasuries are U.S. Treasury debt securities that were not recently issued but have not yet reached maturity. They are not apt for traders seeking frequent buying, selling, or maintaining positions in highly liquid securities. Treasury securities, including bills, bonds, and notes, are debt instruments from the U.S. Treasury Department. In other words, they are safe investments backed by the government. Off-the-run treasuries refer to these securities that are no longer the most recent issues.

Broker-dealers auction off treasuries and sell them to their customers. Investors often purchase these securities and hold them until maturity. High demand from investors can lead to a decrease in supply, potentially causing bid-ask spreads to narrow and increasing liquidity. This demand for the most recently issued treasuries, known as on-the-run treasuries, can result in their prices being bid up and reduced yields.

Investors seeking low-risk and guaranteed returns often find treasury securities a suitable option. On-the-run treasuries, as the most recently issued ones, tend to have higher availability and demand, which makes them relatively more liquid. However, it is incorrect to state that the overwhelming supply reduces the returns. Prevailing interest rates and market demand primarily influence returns on treasury securities. The performance of older treasuries may vary and is not inherently better than newer ones in terms of returns.

Trading Strategy 

Individuals can directly purchase Treasury securities from the U.S. government's website. They can buy these securities through auctions. To perform non-competitive bids, one needs to create a Treasury Direct account. Additionally, banks, brokers, or dealers can facilitate the purchase of securities through competitive and non-competitive bids. The Bureau of the Fiscal Service oversees the website. The website includes information about purchasing, redeeming, replacing, completing forms, and valuing the government's Treasury savings bonds and securities.

As for strategy, investors need to plan their strategy based on many factors, such as their income, goals, expected returns, duration, etc. Observers note that treasury bills with longer maturities exhibit higher returns than those with shorter maturities during continuous interest rate increases. These observations are important when formulating a strategy.

Examples 

Check out these examples for a better idea:

Example #1

Suppose Dave bought a treasury bill on January 1, 2023. He bought it to invest in low-risk securities and use that money to buy a piece of land in the future. The returns on the security looked promising. However, to his surprise, another bill was issued on March 1. This move made the security he purchased an old one. Since there was a new announcement and investors rushed to buy it, including Dave. Unfortunately, he could not. He observed that the return rates sharply reduced even though it was recently issued. Dave still made profits despite being unable to buy that due to his high returns from his old bill.

Example #2

The Covid-19 pandemic has caused stress in U.S. Treasury trading. The Treasury market sized up to $22 trillion, and the period (2020) showed prevailing difficulties in selling them. The benchmark 10-year Treasury yield had a sharp reversal compared to historical norms between February 26th and March 9th, falling 80 basis points to 0.55%, or intraday (0.317%), before rising to 1.20% by March 18th. Traders had also claimed that it was simpler to sell low-grade corporate debt than Treasury securities. The situation looked weak for the treasury market.

A few suggestions were made to address the situation. This included regulations impacting the market and the Federal Reserve's involvement in the Treasury market's infrastructure, which needed to be reviewed. Another suggestion was to extend access to a new Fed backstop beyond banks and primary dealers. Similar suggestions were made to expand the Fed's control over a utility and the membership of an industry clearing house. The third suggestion was to stop banks from clogging up markets by reviewing the leverage regulations that apply to them. The ultimate suggestion was to promote transparency.

Off-The-Run Treasuries vs On-The-Run Treasuries 

The differences are as follows:

Key points	Off-The-Run Treasuries	On-The-Run Treasuries
Concept	They are older securities that were issued.	They were recently issued.
Yield	They yield high yields.	They give low yields compared to the older versions of similar securities.
Liquidity	They are not very liquid, meaning they are not easily traded.	They are easily traded and, hence, liquid.

Frequently Asked Questions (FAQs)

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This has been a guide to what are Off-The-Run Treasuries. We compare them against on-the-run treasuries, explain its examples, & trading strategies. You can learn more about it from the following articles –

• Treasury Inflation Protected Securities
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