On-The-Run Treasury Yield Curve

What is On-The-Run Treasury Yield Curve?

The on-the-run Treasury yield curve graphically shows the current yields versus maturities of the most recently sold U.S. Treasury securities and is the primary benchmark utilized in pricing fixed-income securities.

Understanding On-The-Run Treasury Yield Curve

Basically, the on-the-run treasury yield curve is the U.S. Treasury yield curve that is derived utilizing on-the-run Treasuries and it plots the yields of these instruments, of comparative quality, against their maturities. The on-the-run Treasury yield curve is something contrary to the off-the-run Treasury yield curve, which alludes to U.S. treasuries, of a given maturity, which are not part of the latest issue. On-the-run treasury yield curve is less accurate than off-the-run treasury yield curve as the volatility of current demand for recent supply will in general lead to price distortions.

The on-the-run Treasury yield curve's importance lies in the way that it is commonly used to price fixed-income securities. Be that as it may, its shape is at times contorted by up to several basis points if an on-the-run Treasury goes "on special." A Treasury goes "on special" when its price is briefly bid up. This price increase is generally the consequence of increased demand by securities dealers wishing to involve the security as a hedging vehicle. This hedging can make on-the-run Treasury yield curves to some degree less accurate than off-the-run Treasury yield curves.

The Treasury yield curve shows that there are two important factors that confuse the relationship among maturity and yield.

1. The first is that the yield for on-the-run issues is misshaped since these securities can be financed at less expensive rates, and therefore offer a lower yield than they would without this financing advantage.
2. The second is that on-the-run Treasury issues and off-the-run issues have different interest rate reinvestment risks.

Yield Curve Shapes

The common shape for the on-the-run Treasury yield curve is up inclining as yield increases with maturity, which is alluded to as a normal yield curve. The state of the yield curve is the aftereffect of supply and demand for investments in particular segments of the curve.

For instance, assuming an investment fund decides to invest only in securities with 5-to 10-year maturities, that would raise prices and lower yields in the corresponding segment. Assuming demand by short-term investors is incredibly high, the yield curve will become more extreme.

A inverted yield curve reflects higher interest rates for shorter-term maturities than for longer-term maturities. An inversion in the yield curve can once in a while be the consequence of aggressive central bank policies. These policies briefly raise short-term interest rates to slow the economy. Nonetheless, this is considered to be a short-term abnormality and there is an expectation that the curve will return to a flat or positive structure in the close to term.

A flat yield curve, where short-and long-term rates that are roughly equivalent, is normally associated with a transitional period. This period is when interest rates are moving from a positive yield curve to an inverted yield curve or vice versa.

Highlights

• On-the-run Treasury yield curve is something contrary to the off-the-run Treasury yield curve, which alludes to U.S. treasuries, of a given maturity, which are not part of the latest issue.
• The on-the-run Treasury yield curve graphically shows the current yields versus maturities of the most recently sold U.S. Treasury securities and is the primary benchmark utilized in pricing fixed-income securities.
• On-the-run treasury yield curve is less accurate than off-the-run treasury yield curve as the volatility of current demand for recent supply will in general lead to price distortions.