On-the-Run vs Off-the-Run
On-the-run Treasuries are the most recently issued securities of a given maturity and serve as the current benchmark for that tenor, while off-the-run Treasuries are older issues of the same maturity that have been superseded by newer auctions and typically trade at a modest yield premium due to lower liquidity.
At any given point in time, there is exactly one on-the-run Treasury for each key benchmark maturity: the 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year. The on-the-run security is the most recently auctioned note or bond for that tenor and serves as the market reference benchmark for that maturity point on the yield curve. When market participants, financial media, or the Federal Reserve refer to the 10-year Treasury yield, they are quoting the on-the-run 10-year.
When the Treasury conducts its next regularly scheduled auction at a given maturity, the previously on-the-run security becomes off-the-run. Over time, as subsequent auctions accumulate, a series of off-the-run issues builds up for each tenor. A 10-year note issued in April 2025 becomes off-the-run in May 2025 when the next 10-year note is auctioned, and that original April note will trade in the off-the-run market for the remaining approximately 10 years of its life, though its maturity shortens with each passing month.
The yield difference between on-the-run and off-the-run securities of similar maturity is called the on-the-run/off-the-run spread. This spread exists because on-the-run securities have significantly higher trading volumes and are heavily used in the repo market as collateral, making them more liquid and therefore more expensive (lower yield) than comparable off-the-run securities. The spread typically ranges from a few basis points to several basis points depending on market conditions, widening during periods of stress when liquidity premiums increase.
Off-the-run Treasuries are extensively used by liability-driven investors — insurance companies, pension funds — who are primarily concerned with yield and duration matching rather than daily liquidity needs. Because off-the-run securities trade at higher yields than on-the-run bonds of nearly identical cash flows, long-horizon investors capture an incremental yield pickup without taking meaningful additional credit risk.
The on/off-the-run spread is also a classic relative value trade in fixed income. Hedge funds and bank proprietary desks sometimes buy the higher-yielding off-the-run security and short the lower-yielding on-the-run security of similar maturity, funded through the repo market, to capture the spread as it converges. This trade is typically low-risk in normal conditions but requires careful management of repo financing costs and duration mismatches, and it can suffer significant mark-to-market losses during liquidity crises when the spread widens instead of converging.