Key takeaways
– The on-the-run Treasury yield curve plots yields versus maturities for the most recently issued U.S. Treasury securities (the “on-the-run” issues) and is a primary market benchmark for pricing fixed‑income instruments. (Investopedia)
– Because recently issued Treasuries are more liquid and can be temporarily “on special” (bid up for hedging/use in repo), the on‑the‑run curve can be distorted by several basis points and is sometimes less accurate than off‑the‑run or constructed curves. (Investopedia)
– Common yield‑curve shapes — upward sloping (normal), inverted, and flat — reflect expectations about growth, inflation, and supply/demand dynamics in specific maturity segments.
– Practical use requires knowing where to source current on‑the‑run yields, how to plot and interpret the curve, and how to adjust for liquidity/“special” effects when pricing or hedging.
Understanding the on-the-run Treasury yield curve
– Definition: The on‑the‑run Treasury yield curve is the curve you get when you plot the market yields of the most recently issued U.S. Treasury securities (notes and bonds) against their maturities. These are the current, benchmark securities dealers most frequently trade and reference. (Investopedia)
– Benchmark role: Because on‑the‑run issues are the most liquid and widely quoted, the on‑the‑run curve serves as a primary benchmark for pricing many fixed‑income securities and for market participants’ reference rates. (Investopedia)
Why the on‑the‑run curve can be distorted
– “On special” effect: Sometimes a specific on‑the‑run security becomes highly desirable (e.g., for hedging or repo collateral), pushing its price up and yield down relative to other maturities. This temporary demand-driven move can distort the observed curve by several basis points. (Investopedia)
– Liquidity premium: On‑the‑run issues generally trade at a liquidity premium relative to older (off‑the‑run) issues of identical maturities and coupons, creating small but meaningful differences between on‑ and off‑the‑run yields.
Common yield‑curve shapes and what they indicate
– Normal (upward sloping): Longer maturities have higher yields — typically reflects term premium and higher compensation for locking up capital longer.
– Inverted: Shorter-term yields exceed longer-term yields — often associated with tight short‑term policy rates or expectations of slower future growth (can be driven by aggressive central bank tightening).
– Flat: Short- and long-term yields are roughly equal — often seen during transitions between normal and inverted profiles or when uncertainty compresses term premia.
– Note: Shape results from supply/demand dynamics — heavy buying in a segment (e.g., a fund focused on 5–10 year securities) raises prices and lowers yields in that segment.
On‑the‑run vs off‑the‑run: quick comparison
– On‑the‑run: most recent issues, highest liquidity, widely quoted, may be bid special → primary market benchmark but susceptible to temporary distortions.
– Off‑the‑run: older issues of the same maturities, generally less liquid, sometimes preferred for constructing smoother or more economically representative yield curves (e.g., for bootstrapping zero rates or relative‑value analysis).
Practical steps: how to use the on‑the‑run Treasury yield curve
1. Source current on‑the‑run yields
• Market data vendors (e.g., Bloomberg, Refinitiv/Reuters) provide live on‑the‑run quotes and CUSIPs.
• Public sources include the U.S. Treasury’s published yield data and Federal Reserve releases for constant‑maturity Treasury (CMT) rates — use these for reliable daily snapshots.
2. Select the maturities you want to analyze
• Typical on‑the‑run points: 2‑year, 3‑year, 5‑year, 7‑year, 10‑year, 20‑year (if on‑the‑run), 30‑year. Use the set that matches your instrument or portfolio.
3. Plot yields vs maturities
• Create a simple scatter plot or line chart with maturity on the x‑axis and yield on the y‑axis to visualize shape.
4. Interpret the shape and segment moves
• Look for steepness, bends (humplike features), inversions, and segment‑specific anomalies that may reflect demand shifts.
5. Check for “on special” distortions
• Compare on‑the‑run yields to nearby off‑the‑run issues and to interpolated swap/par curves. Large deviations may indicate a special; use caution pricing directly off the on‑the‑run point.
6. Decide which curve to use for pricing or risk management
• For quick market marks, on‑the‑run yields are standard.
• For valuation, bootstrapping discount factors, or model calibration, consider using a smoothed/par/zero curve constructed from a broader set of Treasury and repo data to avoid special-driven mispricing.
7. Monitor liquidity and trade execution
• Be aware that bid/ask spreads and depth can change rapidly; use executed trade data or dealer quotes when marking positions you plan to trade.
8. Document assumptions
• If you adjust for specials or choose an off‑the‑run or fitted curve, record the rationale and methodology for audit/valuation purposes.
Use cases and practical examples
– Pricing a new corporate bond issue: Dealers will reference the on‑the‑run Treasury curve as a starting benchmark for spread over Treasuries, but they often adjust to account for on‑the‑run distortions and use interpolated par or zero curves for final valuation.
– Relative‑value trading: Traders compare on‑the‑run and off‑the‑run spreads to find cheap/expensive opportunities; an on‑the‑run that is deeply “on special” can create short‑term arbitrage or financing trades.
– Risk management and duration: Use the curve to compute PVs and duration of Treasury positions; when precision is needed (e.g., regulatory valuation), use a constructed zero curve rather than raw on‑the‑run points.
Practical checklist for analysts and portfolio managers
– Get raw on‑the‑run yields from a reliable data feed and record timestamps.
– Plot the curve and cross‑check against off‑the‑run and swap curves.
– Flag any on‑the‑run that trades “on special” (large gap vs alternatives).
– Choose the appropriate curve for the task (market mark vs valuation).
– Reconcile daily marks and document adjustments.
Limitations and cautions
– Short‑term liquidity flows or dealer hedging can move on‑the‑run yields independently of underlying fundamentals.
– Relying solely on on‑the‑run yields for valuation can produce misleading results when those issues are trading at temporary premiums.
– Always consider complementary curves (off‑the‑run, par, zero, or swap curves) for robustness.
Further reading and source
– Investopedia — “On‑the‑Run Curve” (source for definitions, the “on special” concept, benchmark role, and yield‑curve shapes)
(1) show a step‑by‑step example using real‑time data and plot a current on‑the‑run curve; 2) give a short Python script to fetch Treasury yields and plot the curve; or 3) list exact public data feeds (Treasury, Fed) and typical Bloomberg tickers to pull on‑the‑run CUSIPs.)
Continuing from the discussion of a flat yield curve, below are additional sections that expand practical use, examples, construction methods, trading implications, limitations, and a concise conclusion.
Practical Uses of the On-The-Run Treasury Yield Curve
– Benchmarking: The on-the-run curve serves as the primary market benchmark for pricing government and investment-grade fixed-income securities, derivatives, and structured products.
– Relative-value analysis: Traders and portfolio managers compare yields of corporate or municipal bonds to the on-the-run Treasury yields of similar maturities to compute credit spreads and identify mispricings.
– Risk management and hedging: Mortgage managers, bank treasury desks, and fixed-income funds use the on-the-run curve to size hedges (e.g., DV01 matching with Treasury futures or cash bonds).
– Macro signals: The slope and shape (normal, flat, inverted) inform views on economic growth and monetary policy expectations.
How to Construct an On-The-Run Yield Curve — Practical Steps for Analysts
1. Gather on-the-run securities: Collect current market yields for the most recently issued Treasury bills, notes, and bonds across standard maturities (e.g., 1M, 3M, 6M, 2Y, 5Y, 7Y, 10Y, 20Y, 30Y).
• Where to obtain data: TreasuryDirect, Federal Reserve/FRED, Bloomberg, Reuters.
2. Plot yields vs. maturities: Create a scatter plot with maturity on the x-axis and yield on the y-axis.
3. Fit a curve: Use a smooth function (e.g., cubic spline, Nelson–Siegel, Svensson) to fit the discrete on-the-run points and produce a continuous curve.
4. Adjust for on-special distortions: Check for outliers where an issue trades “on special” (an unusually low yield/ high price due to repo or dealer demand). Flag these points for potential adjustment or replacement with off-the-run prices.
5. Bootstrap zero-coupon (spot) curve if needed: Convert coupon-bearing yields into a zero curve via bootstrapping—useful for discounting cash flows and valuation of interest-rate derivatives.
6. Validate and monitor: Compare the on-the-run curve with an off-the-run or model-derived curve; monitor for shifts driven by supply/auction activity or repo market stress.
Example: Interpreting Curve Shapes (Hypothetical Numbers)
– Normal/upward-sloping curve (typical): 2Y: 1.25%, 5Y: 1.75%, 10Y: 2.25%, 30Y: 3.00%
• Interpretation: Investors demand higher yields for longer maturities, reflecting term premia and expectations of higher future rates or inflation.
– Inverted curve (warning sign): 2Y: 3.10%, 5Y: 2.70%, 10Y: 2.40%, 30Y: 2.60%
• Interpretation: Short-term yields exceed long-term yields—often interpreted as the market expecting weaker growth or lower policy rates ahead.
– Flat curve (transition): 2Y: 2.00%, 10Y: 2.05%
• Interpretation: Market uncertainty or a transitional phase between normal and inverted shapes.
Example: Calculating a Spread and Economic Signal
– If 10Y yield = 2.25% and 2Y yield = 1.25%, the 10Y-2Y spread = 100 basis points (bps).
• A widening positive spread typically signals expectations of stronger growth or higher inflation. A narrowing spread approaching zero or turning negative can be an early warning for slowing growth or potential recession.
Example: How “On Special” Affects the Curve (Hypothetical Scenario)
– Suppose the most recent 10-year Treasury issue is in high demand from dealers for repo hedging and trades at a lower yield than other nearby tenors.
– On-the-run 10Y yield = 1.90% while off-the-run 10Y trade-equivalent = 2.05%.
– The on-the-run curve would show an artificial kink (lower yield) at 10 years; relying solely on the on-the-run curve could understate required yields for pricing 10-year cash flows. Practically, an analyst might use the off-the-run quote or a smoothed model for valuation.
Trading and Portfolio Strategies Involving the On-The-Run Curve
– Basis trades: Traders exploit differences between on-the-run and off-the-run yields (the on-off spread). When on-the-run is cheap/expensive relative to off-the-run or futures, a basis trade can be structured to capture mean reversion.
– Curve trades: Positioning for a steepening or flattening of the curve by going long/short different maturities (e.g., long 30Y vs short 2Y in expectation of steepening).
– Hedging with futures: Use Treasury futures (which reference on-the-run deliverable securities) to hedge duration; be mindful of conversion factors and the cheapest-to-deliver option.
– Laddering vs. barbell strategies: Choice of strategy depends on curve outlook. In a normal curve, ladders capture roll-down and reduce reinvestment risk. In a flat or inverted curve, barbells can exploit higher short-term yields plus some long-duration exposure.
Limitations and Pitfalls
– Liquidity and “specialness”: The popularity of the most recent issue can distort yields; on-the-run prices are not always the best proxy for fair value.
– Auction issuance and supply effects: New issuance dates and sizes shift supply/demand and can move on-the-run yields independently of fundamentals.
– Market microstructure: Repo rates, dealer balance-sheet constraints, and regulatory changes can affect relative pricing across tenors.
– Not a pure risk-free discount curve: For some valuation purposes (derivatives discounting, corporate bond relative value), practitioners prefer to blend on-the-run with off-the-run, swap curves, or other constructed zero curves.
Practical Checklist for Using the On-The-Run Curve
1. Confirm data recency and source (auction date, time-stamped quotes).
2. Check for specialness: compare on-the-run yields against nearby off-the-run issues and futures-implied yields.
3. Smooth the curve if necessary using a standard parametric or spline model.
4. Bootstrap a zero curve for discounting if valuing cash flows.
5. Add appropriate credit or liquidity spreads when pricing non-Treasury instruments.
6. Re-test estimates after Treasury auctions and major economic announcements.
When to Use Off-The-Run or Model Curves Instead
– Large valuation tasks where small basis point differences matter (e.g., bank balance-sheet valuation, derivative collateralization).
– When on-the-run issues are demonstrably “on special” or illiquid relative to prior issues.
– For constructing a full zero-coupon curve used in risk systems—off-the-run data plus interpolation/bootstrapping often gives more stable results.
Additional Resources and Data Sources
– U.S. Department of the Treasury: daily Treasury yield curve rates and auction results (treasury.gov).
– FRED (Federal Reserve Bank of St. Louis): historical Treasury yields and series for standard tenors (fred.stlouisfed.org).
– Market data providers: Bloomberg, Refinitiv (for live on-the-run quotes and dealer repo information).
Concluding Summary
The on-the-run Treasury yield curve is a widely used, market-driven snapshot of yields on the most recently issued U.S. Treasury securities across maturities. It functions as the primary benchmark for pricing fixed-income instruments, signaling macro expectations, and facilitating trading and hedging. However, users must be aware of distortions—such as on-special dynamics, auction supply effects, and liquidity differences—that can make on-the-run yields deviate from “pure” market-implied discount rates. For valuation precision, practitioners commonly smooth the on-the-run points, compare against off-the-run prices, and bootstrap a proper zero-coupon curve. In short: the on-the-run curve is indispensable as a benchmark and market signal, but it must be used judiciously and, where necessary, adjusted to account for market microstructure effects.
Sources
– Investopedia — On-The-Run Curve:
– U.S. Department of the Treasury — Daily Treasury Yield Curve Rates:
– FRED — Federal Reserve Bank of St. Louis