What is a Treasury Index

The Treasury index is an index based on the auctions of U.S. Treasury bills, or on the U.S. Treasury's daily yield curve. Financial institutions often use the U.S. Treasury index as a basis for mortgage notes they write. This index basis shows the rate of return investors could likely receive from another bank. 

The various debt instruments sold by the U.S. Treasury come with different maturities of up to 30 years. Treasury bills are short-term bonds that mature within a year, while the Treasury notes have maturity dates of 10 years or less. The longest-term instruments are Treasury bonds, which offer maturities of 20 and 30 years.

BREAKING DOWN Treasury Index

The U.S. government sells debt instruments such as Treasury bills, Treasury notes, and Treasury bonds through the U.S. Treasury to raise money for capital projects, such as improvements to infrastructure. Just like other bonds, Treasuries have an inverse relationship between price and yield. Inverse correlation means as the price rises the yield will decrease. 

The Treasury index has a basis on the U.S. Treasury’s daily yield curve or the curve that shows the Treasury’s return on investment (ROI) on the U.S. government’s debt obligations. Treasury yield determines the interest rate at which the U.S. government can borrow money for various lengths of time. The Treasury yield also affects how much investors can earn when they invest in this debt by buying government securities. The Treasury index is also the source for the interest rates people and companies pay on loans from a financial institution.

The Treasury yield curve is an expression of how investors feel about the economic environment. When yields are higher on long-term Treasuries, the economic outlook is positive. Interest rates increase when the Treasury yield rises because it causes the government to pay higher returns to draw investor interest.

How the Treasury Index is Used

The U.S. Treasury index influences other types of securities and helps illustrate how much risk investors are willing to undertake. Components of a treasury index are likely to be the weighted average prices of five-year, 10-year, and bond-futures contracts. Because the elements have different investment time frames, each weighting is adjusted for equal contribution to the index.

Lenders often use the index to determine mortgage rates for mortgages with an unfixed component and as a performance benchmark for investors in the capital markets because it represents a rate of return that investors would be able to get from almost any bank, with minimal effort. The calculations of treasury indexes and their components vary by the financial institution calculating the index.