DEFINITION of 'One-Year Constant Maturity Treasury - 1-Year CMT'

The one-year constant maturity Treasury (CMT) is the interpolated one-year yield of the most recently auctioned 4-, 13- and 26-week U.S. Treasury bills, the most recently auctioned 2-, 3-, 5- and 10-year U.S. Treasury notes, the most recently auctioned U.S. Treasury 30-year bond, and the off-the-runs in the 20-year maturity range.

BREAKING DOWN 'One-Year Constant Maturity Treasury - 1-Year CMT'

The yield curve enables investors to have a quick glance at the yields offered by short-term, medium-term, and long-term bonds. Also known as the term structure of interest rates, the yield curve is a graph that plots the yields of similar-quality bonds against their time to maturity, ranging from 3 months to 30 years. To be more specific, there are eleven maturities included in the yield curve; these are 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. The yields of these maturities on the curve are referred to as Constant Maturity Treasury (CMT) rates.

Constant maturity yields are interpolated by the Treasury from the daily yield curve. The interpolation is based on the closing market bid yields of the actively traded Treasury securities in the over-the-counter market and calculated from the composites of quotations obtained by the Federal Reserve Bank of New York. Constant maturity, in this context, means that this interpolation method provides a yield for a particular maturity even if no outstanding security has exactly that fixed maturity. For example, the yield on a one-year security can be determined even though no existing debt security has exactly one year to mature.

When the average yields of Treasury securities are adjusted to the equivalent of a one-year security, the term structure of interest rates results in an index known as the one-year constant maturity rate. The U.S. Treasury publishes the one-year CMT value on a daily basis. Official weekly, monthly and annual one-year CMT values are published respectively. The monthly one-year CMT value is a popular mortgage index to which many fixed period or hybrid adjustable-rate mortgages (ARMs) are tied. Lenders use the index, which varies, to adjust interest rates as economic conditions change by adding a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate a borrower must pay. When this index goes up, interest rates on any loans tied to it also go up.

Some mortgages such as payment option ARMs offer the borrower a choice of indexes. This choice should be made with some analysis. Different indexes have relative values which historically are quite constant within a certain range. For example, the one-year CMT index is typically lower than the one-month LIBOR index by about 0.1% to 0.5%. When considering which index is most economical, don't forget about the margin. The lower an index relative to another index, the higher the margin is likely to be.

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