On the run/Off the run


Firstly, According to the curriculum, on the run is the most recent auctioned issue while the off the run issue is the 2nd most recent auctioned issue. According to book, the difference between them is of liquidity.

However, if the off the run issue was issued earlier than off the run issue, then should not its duration be lower also (because it will be outstanding for fewer days)?

And secondly,

“Two factors complicate the relationship between maturity and yield as portrayed by the yield curve. The first is that the yield for on-the-run issues may be DISTORTED by the fact that purchase of the these securities can be financed at lower rates, and as a result these issues offer artificially low yields." …Consequently, incorporated into the price of an on-the-run Treasury security is the cheaper financing available, resulting in a lower yield for an on-the-run issue than would prevail in the absence of this financing advantage.”

Source: CFA Curriculum 2013

Could somebody dumb it down?



Almost: off-the-run is anything other than the most recent, not merely the next most recent.

Yes, the on-the-run Treasuries are the most liquid.

Probably, though the coupon rate will affect the duration as well.

All they’re saying is that there is a liquidity premium for off-the-run Treasuries: they’ll have slightly higher yields than commensurate on-the-run Treasuries.

You’re welcome.

Thanks again man, really appreciate it.

They are calling it “well of the run”. :slight_smile:












Put simply–the 30-year T-Bond issued last week is an on-the-run bond. The 30-year T-Bond issued six months ago is an off-the-run bond. And you noticed correctly that on-the-run bonds are more liquid than off-the-run bonds, and therefore command a higher price, which leads to a lower yield.

You might ask “Why are 29.5-year US Treasuries less liquid than 30-year Treasuries? Are they really that much riskier? Why should I pay more for a 30-year US T-Bond than a 29.5-year T-Bond?” I don’t really know the answer to that.

I guess we can ask the people at LTCM.

Googled LTCM. The first thing I read was “When genius failed”. Lol

Nobel prize winners could not handle off the run/on the run and they expect us to do it. surprise