Just a simple question, what happen between the transition of on-the-run and off-the-run bills?
Are you referring to a t-bond that goes off the run? (e.g,. 30 year)
I don’t really understand your question.
Going off the run is not the same as maturing. What is the question, them?
Yes, you’re right. Maturing is not the same going as off-the-run. I had a couple of questions in my head and they all came out at the same time. I edited the subject so I don’t have to carry the embarassing mistake forever…
What I want to find out is when a t-bond goes off the run. What do brokers/fund managers do in that situation? Additionally, I like to find out how does it impact the portfolio performance.
Any input is much appreciated.
I’m not sure you’re wording your question correctly. If you are, the answer is - very little. For example, let’s assume you buy a 10 yr Treasury when issued (on-the-run). Three years later a 7 yr Treasury is issued with the same maturity as your 10 yr bond (now off-the-run). They will be worth almost the same. Your 10 yr may be worth slightly less if it’s less liquid, but the difference should be minimal.
Edit: After re-reading my post it may be confusing. Your Treasury goes off-the-run the second a new 10 yr bond is issued, not when the 7 year bond is issued. I just used that as an example of comparable pricing. The bottom line is, off-the-run issues don’t really impact anything.
Yeah, there is a small difference in liquidity with USTs between on-the-run and off-the-run, but it’s not particularly material.
The impact might be greater with other sovereigns that aren’t as liquid in the first place.
A few treasury-buyers have on-the-run in their buying mandate, and so that means that the market for those is slightly larger, hence slightly more liquid.
At one point, on-the-run treasuries would trade at a premium to off-the-run-treasuries. There was no real economic reason for this, so hedge funds like LTCM would arbitrage the difference.
This.
On-the-run worth more due to higher liquidity, but both of them are the SAME exact product. However; the difference between the prices can only be exploited with huge sums of money/leverage
Probably not any more though. I’d be shocked if you could still arbitrage treasuries. Even harder stuff like convertible bonds have few mispricings nowadays. Market data and standardized models are too readily available.
Thank you guys, particularly when the wording of the question can [and should] be much better. Will work on the wordings.
The answers are inline with what I had in mind i.e. not much difference. However, I was told by a fairly senior person in one of the top-tier bank that “it was difficult to calculate MTD because there’s on-the-run and off-the-run”. That got me confused…
Anyway, much appreciated with the helps.