Liquidity Fades as Treasuries Age

More than $30 trillion U.S. Treasury debt is outstanding. Less than 4 percent of this amount, which is associated with the most recently issued Treasuries, called on-the-run securities, accounts for 65 percent of average daily trading volume. The remaining portion of the amount outstanding is accounted for by seasoned issues that have been replaced by newer benchmarks, which are referred to as off-the-run securities. In this post, we review the key results in our paper that uses transaction-level Treasury TRACE data to study how trading activity and liquidity evolve as securities move from on-the-run to off-the-run. We show three main patterns. First, off-the-run notes and bonds rely much more on dealer-to-customer intermediation than benchmark securities. Second, trading activity falls sharply and transaction costs increase as securities age. Third, securities that are cheapest to deliver into Treasury futures are an important exception: they trade more actively than other off-the-run bonds of similar age.