Understanding the One-Year Constant Maturity Treasury (CMT): Definition, Mechanism, and Impact on Mortgage Rates

The one-year constant maturity Treasury (CMT) is a calculated yield, specifically the interpolated one-year yield derived from recently auctioned U.S. Treasury bills (T-bills) and notes (T-notes), along with the latest Treasury bond data, including off-the-run Treasuries in the 20-year maturity range.

The concept of constant maturity arises when average yields of Treasury securities are adjusted to the equivalent of a one-year security. This adjustment results in the creation of an index—the one-year constant maturity Treasury. The U.S. Treasury publishes daily values for the one-year CMT, providing insights into the current yields of various Treasury securities.

These constant maturity yields serve as a reference point for pricing debt securities issued by corporations and institutions, providing a benchmark for financial markets.

The one-year CMT is intricately linked to the yield curve, also known as the term structure of interest rates. This curve represents the yields of similar-quality bonds against their time to maturity, ranging from 3 months to 30 years. The yield curve includes 11 maturities, and the yields of these maturities form the CMT rates.

An essential aspect is the interpolation method used to derive these constant maturity yields. The U.S. Treasury employs an interpolated yield curve (I-curve), calculated from the closing market bid yields of actively traded Treasury securities in the over-the-counter (OTC) market. This method, based on quotations obtained by the Federal Reserve Bank of New York, ensures a yield for a specific maturity, even if no outstanding security exactly matches that fixed maturity.

The term “interpolated curve” refers to the technique of estimating values between two known points on a curve. In the context of the one-year CMT, the U.S. Treasury’s interpolation method allows for the determination of yields for maturities that may not have exact corresponding outstanding securities.

This approach aids investment professionals in calculating the yield on a one-year security, providing valuable insights for financial decision-making.

The monthly one-year CMT value serves as a widely used mortgage index, particularly in the realm of adjustable-rate mortgages (ARMs). Lenders leverage the fluctuating nature of this index to adjust interest rates for borrowers.

As economic conditions evolve, lenders modify interest rates by adding a fixed margin to the one-year CMT index. This adjustment ensures that borrowers’ interest rates align with prevailing market conditions. It’s crucial for borrowers to understand this mechanism, as it directly impacts the cost of their mortgage.

Some mortgages, such as payment option ARMs, offer borrowers a choice of indexes to determine interest rates. Careful consideration of this choice, often guided by an investment analyst, is essential, as different indexes historically maintain relative values within a certain range.

For instance, comparing the one-year CMT index to the one-month London Interbank Offered Rate (LIBOR) index (though LIBOR is being phased out for rate setting) reveals nuances that borrowers need to consider. The margin, or spread between the CMT and a benchmark rate or index, plays a pivotal role in determining the most economical index for borrowers.

The one-year CMT value is published daily by the U.S. Treasury. Additionally, weekly, monthly, and annual values are provided to offer comprehensive insights into constant maturity yields.

The U.S. Treasury uses an interpolated yield curve (I-curve) based on actively traded Treasury securities’ closing market bid yields in the over-the-counter (OTC) market. This method calculates constant maturity yields even for maturities without exact corresponding outstanding securities.

The monthly one-year CMT value is a significant mortgage index, influencing adjustable-rate mortgages (ARMs). Lenders use this index to adjust interest rates for borrowers based on prevailing market conditions, adding a fixed margin to the CMT index.