Research On On/Off-the-run Yield Spreads Of Treasury Bonds In China Interbank Bond Market

The Treasury bond market plays an important role in regulating macro economy and guiding the financial markets.It is driving force to promote economic and financial market development.The liquidity of Treasury bonds is an important benchmark to measure whether the Treasury bond market have performed its functions.In Treasury bond market,the most-recent issued bond is called on-the-run bond and last issued ones are called off-the-run bonds.In countries with highly developed financial markets such as the United States,Germany and Japan,there is on-the-run phenomenon in Treasury bond market,which means on-the-run bonds which are more liquid are often traded at higher price with lower yields to maturity(YTM).The difference in liquidity leads to the on/off-the-run spreads.Using the data of Treasury bonds YTM in China Interbank Bond Market from Jul 2009 to Jun 2016,this paper empirically shows that 5-year,7-year and 10-year on-/off-the-run yield spreads are statistically negative.Additionally,a state-space model is developed to decompose Treasury bond TYM into risk-free factor and liquidity premium factor and directly quantify them without any proxies.The numerical calculation method gives the result that the gap of liquidity premium between on-the-run bonds and off-the-run bonds gets wider as the term increases.This paper argues that this phenomenon is mainly related to different investment strategy of Treasury bond investors.