What are on-the-run vs off-the-run Treasuries?

In the Treasury market, "on-the-run" refers to the most recently auctioned security at a given maturity (the current 2-year, 5-year, 10-year, or 30-year), while "off-the-run" refers to all previously issued securities at that maturity. This distinction matters because on-the-run Treasuries are dramatically more liquid than their off-the-run counterparts, and this liquidity difference creates a persistent yield spread between them.

On-the-run Treasuries serve as the benchmark securities that the financial world references. When you hear "the 10-year yield is 4.5%," that refers to the on-the-run 10-year note. These securities attract the highest trading volumes because they are used as hedging instruments by dealers, as collateral in the repo market, and as reference rates for pricing everything from mortgages to corporate bonds. Their liquidity premium means they trade at slightly lower yields (higher prices) than similar-maturity off-the-run issues.

The yield spread between on-the-run and off-the-run Treasuries, known as the "on-the-run premium" or "liquidity premium," typically ranges from 1 to 5 basis points during normal markets. During periods of financial stress, this spread can widen significantly as investors rush into the most liquid securities and flee from less liquid ones. The widening of this spread during March 2020 was one of the triggers for the Fed's emergency Treasury market intervention.

Hedge funds frequently exploit this spread through basis trades, going long off-the-run Treasuries and short on-the-run Treasuries, profiting as the off-the-run bonds gradually converge in yield with on-the-run securities as new auctions shift the "on-the-run" designation. This relative value trade is one of the most common strategies in fixed-income arbitrage, though it carries liquidity risk because the spread can widen before it converges, as demonstrated in the LTCM blow-up of 1998 and the March 2020 Treasury market dislocations.