One-Year Constant Maturity Treasury

What Is the One-Year Constant Maturity Treasury (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 (T-bills); the most recently auctioned 2-, 3-, 5-, and 10-year U.S. Treasury notes (T-notes); the most recently auctioned U.S. Treasury 30-year bond (T-bond); and the off-the-run Treasuries in the 20-year maturity range.

Understanding the One-Year CMT

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 Treasury.

The U.S. Treasury publishes the one-year CMT value daily, along with the respective weekly, monthly, and annual one-year CMT values. Constant maturity yields are used as a reference for pricing debt security issued by entities such as corporations and institutions.

Tied to the Yield Curve

The yield curve—critical in determining a benchmark for pricing bonds—gives investors a quick glance at the yields offered by short-, medium-, 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.

The yield curve includes 11 maturities, which 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 the CMT rates.

An Interpolated Curve

The one-year CMT is tied to an interpolated yield curve (I-curve). The U.S. Treasury interpolates the constant maturity yields from the daily yield curve, based on the closing market bid yields of the actively traded Treasury securities in the over-the-counter (OTC) 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. In other words, investment professionals can determine the yield on a one-year security even though no existing debt security has exactly one year to mature.

CMTs and Mortgage Interest Rates

The monthly one-year CMT value is a popular mortgage index to which many fixed-period or hybrid adjustable-rate mortgages (ARMs) are tied. As economic conditions change, lenders use this index—which varies—to adjust interest rates 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 with which to determine an interest rate. However, borrowers should consider this choice carefully with the help of an investment analyst, as different indexes have relative values that historically are quite constant within a certain range.

For example, the one-year CMT index used to be set lower than the one-month London Interbank Offered Rate (LIBOR) index (LIBOR, however, is being phased out for rate setting). So, when considering which index is most economical, don't forget about the margin, or spread between the CMT and some benchmark rate or index. The lower an index relative to another index, the higher the margin likely would be.