Detailed Analysis of STRIPS Trading Activity and Market Context

Michael J. Fleming and Or Shachar from the Federal Reserve Bank of New York provide a detailed examination of Separate Trading of Registered Interest and Principal of Securities (STRIPS), analyzing trading activity from July 2024 to June 2025 using FINRA’s Trade Reporting and Compliance Engine (TRACE) data. While STRIPS contribute significantly to Treasury securities trading, historical data has remained elusive until now.

Understanding STRIPS

STRIPS, or Separate Trading of Registered Interest and Principal of Securities, are zero-coupon securities formed from Treasury securities by separating cash flows into individual coupon and principal components. This process allows for the creation of multiple securities from a single Treasury instrument. For instance, a 10-year note can yield twenty separate coupon payments and one principal payment, culminating in twenty-one unique securities, each assigned its own CUSIP number.

These securities are particularly beneficial for investors with specific liability matching needs, such as pension funds and insurance companies. Given their known cash flows on predetermined dates, STRIPS allow for precise alignment of cash inflows with financial obligations. They also provide insights into the yield curve, enhancing both risk management and investment flexibility.

Notably, STRIPS can be restructured back into their original securities. Investors can request to consolidate the individual components again if market conditions suggest consolidation will enhance value.

Current Landscape of STRIPS

As of June 2025, $560 billion worth of U.S. Treasury securities existed in stripped form, representing approximately 2.5% of the total $22.2 trillion in marketable notes, bonds, and Treasury Inflation-Protected Securities (TIPS). Notably, bills and floating rate notes are not applicable for STRIPS. Bonds dominate the stripped securities market, constituting 98.1%, followed by notes at 1.9%, and TIPS at a mere 0.002%.

Demand for long-duration instruments fuels this trend, as liability-driven investors typically favor long-maturity bonds. The concentration of stripped securities highlights significant variances among different bond issues; while some securities remain largely unstripped, others like the May 15, 2053 bond have seen up to 36% of their issuance stripped by comparison.

Trading Volume and Activity

The analysis reveals daily trading volume of STRIPS averaged $5.6 billion from July 2024 to June 2025, with principal STRIPS witnessing $3,856 million (68%) in trading volume compared to $1,784 million (32%) for coupon STRIPS. In broader context, the average daily trading volume for Treasury notes, bonds, and TIPS during the same period was significantly higher, at $739 billion.

The trading activity patterns also reflect the structural nuances of STRIPS, where principal STRIPS exhibit a tendency to congregate in longer maturity ranges. Conversely, coupon STRIPS display a more evenly distributed trading volume reflective of their semi-annual payment structure. Principal STRIPS' more extended maturities correlate with heightened trading activity, mirroring interest from major institutional investors.

Market Dynamics and Trading Venues

Examining trading venues reveals a marked concentration of activity; approximately 73% of coupon STRIPS and 88% of principal STRIPS trade in the dealer-to-client (DTC) market. The daily average volume in DTC reached $1,309 million for coupon STRIPS and $3,396 million for principal STRIPS. This focus on the DTC marketplace highlights the appeal of these securities among end-users who value their transparency and associated risk management benefits.

Trade sizes reflect the differing nature of coupon versus principal STRIPS, with coupons averaging $850,000 against principal STRIPS averaging a significantly higher $7 million. The dealer-to-client market typically sees larger trade sizes, especially for principal STRIPS, indicating a preference among institutional players for larger transactions. Remarkably, trade sizes increase with longer maturity durations—principal STRIPS in the 25-30 year spectrum have average sizes of $12.3 million compared to $2.8 million for their shorter 10-15 year counterparts.

Trading Frequency Insights

Analyzing the frequency of trading reveals that the 0-5 year maturity bucket for STRIPS is traded most frequently, with a comparable number of trades occurring within both the DTC and dealer-to-dealer (DTD) segments. However, as maturity extends, a general decline in trading frequency is observed for coupon STRIPS, while principal STRIPS experience fluctuations with a resurgence in trading activity for maturities beyond 10-15 years.

Final Thoughts on STRIPS Trading Activity

The comprehensive analysis underscores that trading activities are heavily weighted towards long-maturity principal STRIPS, aligning with behaviors observed among liability-driven investors who prioritize stability and duration in their investment strategies. The higher trading volumes associated with principal STRIPS suggest they may experience better market liquidity, subsequently impacting pricing structures against coupon STRIPS of similar maturities. Future inquiries into these liquidity differentials and their impact on the pricing mechanics within the STRIPS landscape may yield valuable insights.

In conclusion, STRIPS provide a unique avenue for investors to navigate the Treasury securities market, and understanding their trading landscape is fundamental for evaluating both current and future investment strategies.