Off the run and on the run bonds (with brief on new 10yr Issuance)

We normally hear experts citing few papers (bonds) as either on the run or off the run. Now let’s try and understand what it means…

Government raises fund by issuing bonds. This bond can either be newly issued or by issuing additional paper of already issued bonds. E.g. If government wish to borrow 100rs with 5yr maturity and 100rs with 10yr maturity then it will first prefer already issued or say available paper maturing in 2017(currently 2012+ 5yrs) and 2022 (currently 2012+10yrs). If let’s say govt. finds 2017 paper which they previously issued but do not have any paper maturing in 2022 than it would raise 100rs by issuing same 2017 security with same coupon and 100rs by issuing a new 10yr Gsec.

Most recently or newly issued papers are said to be “on the run” papers. Hence in our example 2022 security will be seen as on the run paper. On the run paper is considered to be very liquid as RBI (Central Bank) keeps issuing more papers of same bond to fulfill governments requirement. There exists some limit after which a new paper is issued. i.e. Once the 2017 paper outstanding rises above 65000-75000Cr government avoids raising fund using the same paper rather they prefer either issuing new security. Now when this 2017 paper outstanding amount reaches stipulated amount then it is termed as off the run paper. As soon as the outstanding of any particular paper rises to 60000cr that particular paper is avoided by the participants or they price the bond keeping illiquidity in mind. i.e. let’s say 10yr Gsec 2022 is trading at 8% as on 01-Apr-2013 and government is planning to issue a new 10Yr (2023) within a week or so then New G-sec is expected to have cut off yield at ~7.80%-~7.85% (Note: After 2023 issuance, 2022 paper will be defined as off the run paper and 2023 will be on the run). The reason being participants are aware that once 2023 papers comes into existence trading volume in 2022 will reduce significantly hence in price terms they expect discount.

In a falling yields scenario if you see 10yr G-sec is falling less compared to other top traded papers than probably that particular 10yr paper outstanding amount may have reached 60000Cr. As discussed above 60000cr market starts pricing in illiquid discount i.e. It demand high yield as the then 10yr will become off the run in a short while after which it is assumed to turn  illiquid.

Some historical fact on 10 Yr G-sec new issues

2010
Previous 10Yr		New 10Yr
Date	Yield	Date	Yield
29-Apr-2010	8.09	30-Apr-2010	7.80
2011
Previous 10Yr		New 10Yr
Date	Yield	Date	Yield
3-Nov-2011	8.89	4-Nov-2011	8.79
2012
Previous 10Yr		New 10Yr
Date	Yield	Date	Yield
7-June-2012	8.34	8-June-2012	8.15

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