On-the-run Treasuries are the most recently auctioned securities at each standard maturity (2-year, 5-year, 10-year, etc.). They are the benchmark issues that define the yield curve and trade with the tightest bid-ask spreads and deepest liquidity.
Once a new issue is auctioned at the same maturity, the previous on-the-run becomes off-the-run. Off-the-run securities are identical in credit quality but trade at a small yield premium (the "liquidity premium") because they are less actively traded.
The on-the-run / off-the-run spread reflects pure liquidity demand:
Typical spread: 2-10 bps, depending on market conditions
In crises: the spread can widen dramatically as investors flee to the most liquid instruments
On-the-run Treasuries are important because:
Benchmark pricing: the par yield curve is fitted primarily to on-the-run issues
Repo market: on-the-run issues often trade "special" in the repo market, meaning they can be borrowed at below-market rates due to strong demand
Hedging: derivatives desks and mortgage hedgers use on-the-run Treasuries as their primary hedge instruments
Index construction: major bond indices reference on-the-run yields
The transition from on-the-run to off-the-run creates a predictable price dislocation that some relative value traders exploit.
Treasury Auction— The process by which the U.S. government sells new debt securities to fund operations. Auction results signal demand strength via bid-to-cover, tail, and bidder allocations.
Par Rate— The coupon rate at which a bond prices at par (100), forming the standard Treasury yield curve.
Yield Curve— A line plotting Treasury yields across maturities from 1-month bills to 30-year bonds. The global benchmark for risk-free rates and the term structure of interest rates.