On-the-run vs off-the-run
Fixed IncomeDefinition
On-the-run = the most recently issued Treasury at each maturity (the most liquid). Off-the-run = older issues with the same time-to-maturity. On-the-run trades at a small yield discount to off-the-run because of liquidity premium.
The "on/off spread" is a real-time stress gauge. Spreads usually 1-2 bps; widen to 10-20 bps in funding stress (2008, March 2020). LTCM blew up 1998 betting the spread would converge — converged eventually but after a 50% drawdown.
The "on/off spread" is a real-time stress gauge. Spreads usually 1-2 bps; widen to 10-20 bps in funding stress (2008, March 2020). LTCM blew up 1998 betting the spread would converge — converged eventually but after a 50% drawdown.