Off-the-Run Treasuries

Off-the-Run Treasuries

Any set of U.S. Treasury securities of a certain maturity except for the one most recently issued. For example, if the Treasury issues one year notes in May, June, and July, and it is now August, the off-the-run Treasuries are those issued in May and June. Off-the-run Treasuries are less actively traded than on-the-run Treasuries and as a result have a slightly higher yield.
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On-the-run nominal Treasury securities were viewed as the ultimate liquid instruments, but even off-the-run Treasuries benefited, which contributed to the sharp decline in their yields.
Reflecting this divergence, market participants have experimented with using off-the-run Treasuries as references for bringing new corporate issues to market.
Unfortunately, the same feature that may make off-the-run Treasuries a better gauge of Treasury market performance--their relative lack of liquidity--also makes them poor vehicles for hedging purposes as well as more susceptible to idiosyncratic price changes.
First, even prior to the crisis, spreads between swaps and off-the-run Treasuries were wide.
Second, and more importantly, the widening of yield spreads between on-the-run and off-the-run Treasuries is in fact the kind of reaction one can expect in a generalized market panic, where many counterparties were unclear as to the extent of risks being undertaken.