The eSpeed and BrokerTec ECNs have captured virtually the entire market for the on-the-run Treasuries
Dealers sell short on-the-run Treasuries in order to hedge the interest rate risk in other securities.
As noted above, on-the-run Treasuries are more liquid than older Treasuries; indeed, on-the-run Treasuries are perhaps the most liquid securities in the world.
On-the-run Treasuries generally became relatively more valuable as investors sought not only the safety of Treasury securities but also the liquidity of the on-the-run issues in the so-called flight to liquidity.
Fleming's paper does a good job of documenting the complex issues raised by the crisis in 1998 and the problems of Long-Term Capital Management, as well as the total seizing up of credit markets and the flight to quality into on-the-run Treasuries.
In order to calibrate the pricing model so that the on-the-run Treasuries
are repriced exactly, the theoretical discount function (5) must agree with the discount function derived from the observed current Treasury prices at all nonnegative levels of interest rate volatility.
It is where market participants go to hedge interest rate risks, whether for on-the-run Treasuries
or futures contracts.