Is the yield of a 30-year bond, issued 29 years ago and maturing in 1 year, equivalent to that of a 1-year bond maturing on the same date?

Question

The question assumes both bonds are US Treasury bonds.

I'm seeking clarity on whether the difference in original issuance date and remaining time to maturity impacts yield parity between these bonds.

Any insights on this would be valuable.

Answer 1

In theory, since there is no credit risk, you should expect to get the same yield as a newly issued 1-year bill and a 30-year bond with 1 year remaining.

In practice, however, there is a liquidity premium since there is more competition for newly issued bonds than bonds that someone already holds, so you might get slightly less yield for an existing bond (called "off-the-run") than a newly issued bond (called "on-the-run"). However the difference should not be be material, otherwise there would be an arbitrage possibility.

There might also be slight differences in yield if the coupons are significantly different, since, depending on the cash flow strategy, one might be willing to pay more for a higher coupon bond since they get at least some cash flow earlier. But the difference should be relatively small here as well.