Liquidity Fades as Treasuries Age

Alain Chaboud, Ellen Correia Golay, Michael J. Fleming, Yesol Huh, Frank M. Keane, and Or Shachar

Greater than $30 trillion U.S. Treasury debt is excellent. Lower than 4 % of this quantity, which is related to probably the most just lately issued Treasuries, known as on-the-run securities, accounts for 65 % of common day by day buying and selling quantity. The remaining portion of the quantity excellent is accounted for by seasoned points which have been changed by newer benchmarks, that are known as off-the-run securities. On this publish, we assessment the important thing leads to our paper that makes use of transaction-level Treasury TRACE information to check how buying and selling exercise and liquidity evolve as securities transfer from on-the-run to off-the-run. We present three fundamental patterns. First, off-the-run notes and bonds rely way more on dealer-to-customer intermediation than benchmark securities. Second, buying and selling exercise falls sharply and transaction prices enhance as securities age. Third, securities which can be most cost-effective to ship into Treasury futures are an vital exception: they commerce extra actively than different off-the-run bonds of comparable age.

Off-the-Run Buying and selling Takes Place in a Totally different A part of the Market

We depend on Treasury TRACE transactions information to trace how buying and selling exercise and liquidity change as particular person securities season. Such information have been collected since July 2017 and are analyzed in previous Liberty Road Economics posts inspecting the market’s construction, the marketplace for securities which have been introduced for public sale however not but issued, and the focus of buying and selling quantity on the final day of every month. In what follows, we primarily give attention to 2-year nominal coupon securities, however the outcomes typically carry over to different sectors, together with the 5-, 10-, and 30-year nominal coupon securities which can be lined within the paper. One limitation is that the info supplies us with executed trades, however not quotes or different pre-trade info, and so a few of our liquidity measures are biased towards securities that commerce sufficiently to permit us to calculate such measures.

The Treasury money market is break up between dealer-to-customer buying and selling and interdealer buying and selling. On-the-run securities dominate the interdealer section, particularly on digital platforms. Off-the-run securities, against this, rely way more on dealer-to-customer exercise. From January by June 2024, on-the-run notes and bonds averaged about $262.9 billion per day in different buying and selling system (ATS) and interdealer buying and selling, versus $174.8 billion in dealer-to-customer buying and selling (see desk beneath). Off-the-run notes and bonds appeared very completely different: solely $51.3 billion per day traded in ATS and interdealer venues, in contrast with $103.3 billion in dealer-to-customer markets. In different phrases, when a Treasury goes off-the-run, its buying and selling exercise shifts towards a special buying and selling venue, along with changing into much less lively than its benchmark model.

On-the-Run Buying and selling Is Concentrated within the Interdealer Market, Whereas Off-the-Run Notes and Bonds Rely Extra on Supplier-to-Buyer Exercise

One cause for this alteration is that off-the-run securities are tougher to match instantly. Chaboud et al. (2025) discover that solely 18 % of buyer buying and selling exercise in off-the-run securities had offsetting exercise in the identical safety inside the similar fifteen-minute interval. This means that it’s tough to pair consumers and sellers with no vendor taking stock, which helps clarify why off-the-run buying and selling depends extra closely on vendor intermediation.

Buying and selling Quantity Declines As soon as a Safety Goes Off-the-Run

The info present that buying and selling quantity declines considerably as soon as a safety strikes off the run. Within the 2-year sector, the on-the-run be aware averages $56.3 billion in day by day quantity, whereas the primary off-the-run (the second latest challenge) averages $5.5 billion and the second off-the-run (the third latest challenge) averages $1.6 billion (see charts beneath). The identical sample seems in different maturities.

The decline in buying and selling frequency is equally massive. The on-the-run, 5-year be aware averages about 37,900 trades per day, in contrast with 465 for the primary off-the-run. Within the 10-year sector, the on-the-run averages about 37,523 trades per day, in contrast with 661 for the primary off-the-run. These variations counsel that the transition to off-the-run standing is related to a significant change in how these securities commerce.

Adjustments within the common commerce dimension are additionally in keeping with buying and selling shifting away from high-frequency interdealer platforms and towards dealer-to-customer channels, the place bigger transactions are extra widespread. Specifically, within the 5-year sector, common commerce dimension rises from about $3 million for the on-the-run to $16 million for the primary off-the-run. Within the 10-year sector, it rises from about $2 million to $10 million, and within the 2-year sector from about $4 million to $11 million.

The outcomes additionally present that exercise within the off-the-run section shouldn’t be uniform. Off-the-run securities account for about 30 % of general coupon buying and selling quantity, with the primary and second off-the-runs making up about 15 % of all coupon exercise and deeper off-the-runs accounting for the remaining 15 %. So, the primary few off-the-runs are nonetheless an vital a part of the market, however they nonetheless commerce very otherwise from the securities that changed them as benchmark securities.

Decrease Buying and selling Exercise Is Matched by Wider Efficient Bid-Ask Spreads as Securities Age

We measure buying and selling prices by calculating efficient bid-ask spreads because the distinction between the typical worth of buyer purchase trades and the typical worth of buyer promote trades divided by the midpoint between the typical buyer purchase and promote costs. Decrease efficient spreads point out larger liquidity. We discover a clear sample throughout maturities: on-the-run securities are probably the most liquid, first off-the-runs are much less liquid, and deeper off-the-runs are much less liquid nonetheless. Within the 2-year sector, the typical efficient unfold rises from 0.66 foundation factors for the on-the-run to 1.22 foundation factors for the primary off-the-run and a pair of.23 foundation factors for the second off-the-run. This sample is mostly comparable for the opposite sectors. In a number of sectors, the transfer from on-the-run to first off-the-run roughly doubles the efficient bid-ask unfold. Thus, these modifications are economically significant. Decreased liquidity of a safety after shedding its benchmark standing mirrors the decline in its traded amount.

The liquidity sample turns into much more pronounced in pressured circumstances. In March 2020, for instance, the typical efficient unfold for the 2-year on-the-run rose from 0.66 foundation factors within the full pattern to 1.38 foundation factors. The primary off-the-run rose from 1.22 to 4.23 foundation factors, and the second off-the-run from 2.23 to 7.45 foundation factors. These widenings counsel that the market’s capability to soak up promoting strain weakens extra for seasoned securities at occasions of stress.

There’s one vital caveat when decoding the outcomes for very deep off-the-runs. As a result of the efficient unfold measure is predicated on executed trades, it could understate illiquidity when securities merely don’t commerce fairly often. Some deep off-the-run securities present considerably narrower efficient spreads in March 2020 than within the full pattern, however that seemingly displays the bounds of utilizing transaction-based measures when exercise turns into extraordinarily sparse. Rare buying and selling is itself usually an indication of poor liquidity.

Least expensive-to-Ship Securities Are an Essential Exception

Some off-the-run securities change into the most affordable to ship into Treasury futures contracts. These bonds matter for hedging, futures supply, and foundation buying and selling, so they need to entice extra buying and selling curiosity than in any other case comparable off-the-run securities. By regressing day by day buying and selling quantity on the CUSIP-day stage on every bond’s on-the-run/off-the-run standing and on a dummy variable that identifies whether or not a bond is the cheapest-to-deliver (CTD) for the related Treasury futures contract, we present that being the most affordable to ship is related to about $1.31 billion in further day by day buying and selling quantity within the 5-year sector. Within the 10-year sector, the CTD impact is about an extra $0.75 billion in buying and selling quantity, and within the 2-year sector it’s about $0.51 billion. The 5-year impact is very broad-based, displaying up throughout dealer-to-customer, interdealer, and interdealer dealer (IDB) exercise.

This exception issues as a result of it exhibits that off-the-run securities don’t change into much less liquid solely as a result of they’re older. They change into much less liquid as a result of the makes use of traders have for them change, the buying and selling venue they depend on modifications, and/or the diploma of pure two-way buying and selling circulate modifications.

Summing Up

Market circumstances change notably when Treasury securities go off-the-run. Buying and selling shifts away from the interdealer market section and towards dealer-to-customer intermediation. Volumes and commerce frequency fall sharply, whereas efficient bid-ask spreads widen. These patterns seem as quickly as a bond loses benchmark standing and change into extra pronounced because the bond seasons additional. On the similar time, the outcomes for a way cheapest-to-deliver standing impacts buying and selling exercise present that this course of shouldn’t be inevitable: when a seasoned bond stays central to hedging and futures supply, it could retain a lot stronger buying and selling exercise than its age alone would predict.

Alain Chaboud is a former principal economist on the Federal Reserve Board of Governors.

Ellen Correia Golay is a capital markets buying and selling advisor within the Federal Reserve Financial institution of New York’s Markets Group.

Michael J. Fleming is head of Capital Markets within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group. 

Yesol Huh is a former principal economist on the Federal Reserve Board of Governors.

Frank Keane is a former coverage and market-monitoring advisor within the Federal Reserve Financial institution of New York’s Markets Group.

Or Shachar is a monetary analysis advisor within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

 
@article{AlainChaboud,EllenCorreiaGolay,MichaelJ.Fleming,YesolHuh,FrankM.Keane,andOrShachar2026,
    creator={Alain Chaboud, Ellen Correia Golay, Michael J. Fleming, Yesol Huh, Frank M. Keane, and Or Shachar},
    title={Liquidity Fades as Treasuries Age},
    journal={Liberty Road Economics},
    be aware={Liberty Road Economics Weblog},
    quantity={June 30},
    yr={2026},
    url={https://doi.org/10.59576/lse.20260630}
}