On-the-Run Treasuries: Are They Safe?

When investors seek safety in the bond market, U.S. Treasury securities often top the list of considerations. Among these government-backed investments, on-the-run Treasuries represent the most recently issued bonds. These are bonds of a particular maturity and are distinct from their older “off-the-run” counterparts. But just how safe are these popular securities? Investors consider on-the-run Treasuries among the safest investments available. Why? Because they are backed by the full faith and credit of the U.S. government. However, even these premier government securities aren’t immune to market risks.

Consider working with a financial advisor if you need help understanding what types of investments are safe for your portfolio.

What Are On-the-Run Treasuries?

On-the-run Treasuries are the most recently issued U.S. Treasury bonds, notes or bills of a particular maturity. These securities represent the current benchmark for their specific maturity term in the Treasury market. When the U.S. Treasury Department conducts a new auction for a particular maturity, the newly issued security becomes the on-the-run Treasury. The previously issued security of the same maturity becomes “off-the-run.”

These Treasuries typically enjoy significantly higher trading volume and liquidity compared to their off-the-run counterparts. This enhanced liquidity means investors can buy or sell these securities quickly with minimal price impact. Financial institutions, pension funds and large investors often prefer on-the-run Treasuries. They use them when they need to execute large trades or when they need to hold assets that easily convert to cash.

On-the-run Treasuries serve as crucial benchmarks for pricing many other fixed-income securities and derivatives. Analysts use these yields when determining appropriate rates for corporate bonds, mortgage-backed securities and various debt instruments. Financial professionals use these benchmark rates as foundational reference points when valuing other assets or structuring new financial products.

On-the-Run vs. Off-the-Run Treasuries

Off-the-run Treasuries typically experience lower trading volumes and less market attention. This often results in slightly higher bond yields to compensate investors for reduced liquidity.

The yield difference between on-the-run and off-the-run Treasuries is known as the liquidity premium. This premium exists because investors generally prefer the more liquid on-the-run securities and are willing to accept lower yields for this benefit. During normal market conditions, this premium is relatively small. However, it can widen significantly during periods of market stress when liquidity becomes more valuable.

For long-term investors, off-the-run Treasuries may offer better value due to their slightly higher yields. The liquidity disadvantage matters less if you plan to hold the security until maturity. Conversely, traders and institutions that require the ability to quickly enter and exit positions often prefer on-the-run Treasuries despite their lower yields.

Are On-the-Run Treasuries Considered a Safe Investment?

Experts consider on-the-run Treasuries among the safest investments available in financial markets. Backed by the full faith and credit of the U.S. government, these securities carry minimal default risk. This government guarantee makes them a cornerstone of many conservative investment portfolios, particularly during times of economic uncertainty when investors seek refuge in safe-haven assets.

One of the primary benefits of on-the-run Treasuries is their exceptional liquidity. These securities trade in a deep, active market with narrow bid-ask spreads. This allows investors to buy or sell large positions with minimal price impact. This liquidity feature enhances their safety profile, too. Investors can quickly convert these holdings to cash when needed without significant value loss.

Many financial advisors recommend including on-the-run Treasuries as part of a diversified investment portfolio. These securities often move inversely to riskier assets like stocks during market downturns, providing valuable portfolio protection. Their predictable income stream and principal preservation characteristics make them especially suitable for investors approaching retirement or those with low risk tolerance.

One drawback of standard on-the-run Treasuries is their vulnerability to inflation. Fixed interest payments may lose purchasing power during periods of high inflation. For investors concerned about this risk, Treasury Inflation-Protected Securities (TIPS) offer an alternative that provides explicit inflation protection, though typically with lower initial yields than conventional Treasuries.

Bottom Line

When considering investment options, on-the-run Treasuries stand out as some of the safest securities available in financial markets. Backed by the full faith and credit of the U.S. government, these most recently issued Treasury securities offer unparalleled security against default risk. While no investment is completely without risk, the likelihood of the U.S. government failing to meet its debt obligations remains extremely low.

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