What Is Constant Maturity?
Constant maturity is an adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of various Treasury securities maturing at different periods. Constant maturity yields are used as a reference for pricing various kinds of debt or fixed-income securities. The most common such adjustment is the one-year constant maturity Treasury (CMT), which represents the one-year yield equivalent of the most recently auctioned Treasury securities.
Key Takeaways
- Constant maturity interpolates the equivalent yields on bonds of various maturities in order to make apples-to-apples comparisons.
- Constant maturity adjustments are commonly seen in calculating U.S. Treasury yield curves as well as in computing rates on adjustable mortgages.
- Constant maturity also factors in to certain types of swaps contracts in order to standardize the cash flows owed or due on the swap agreement.
Constant Maturity Explained
Constant maturity is the theoretical value of a U.S. Treasury that is based on recent values of auctioned U.S. Treasuries. The value is obtained by the U.S. Treasury on a daily basis through interpolation of the Treasury yield curve which, in turn, is based on closing bid-yields of actively-traded Treasury securities. It is calculated using the daily yield curve of U.S. Treasury securities.
Constant maturity yields are often used by lenders to determine mortgage rates. The one-year constant maturity Treasury index is one of the most widely used, and is mainly used as a reference point for adjustable-rate mortgages (ARMs) whose rates are adjusted annually.
Since constant maturity yields are derived from Treasuries, which are considered risk-free securities, an adjustment for risk is made by lenders by means of a risk premium charged to borrowers in the form of a higher interest rate. For example, if the one-year constant maturity rate is 4%, the lender may charge 5% for a one-year loan to a borrower. The 1% spread is the lender's compensation for risk and is the gross profit margin on the loan.
Constant Maturity Swaps
A type of interest rate swaps, known as constant maturity swaps (CMS), allows the purchaser to fix the duration of received flows on a swap. Under a CMS, the rate on one leg of the constant maturity swap is either fixed or reset periodically at or relative to London Interbank Offered Rate (LIBOR) or another floating reference index rate. The floating leg of a constant maturity swap fixes against a point on the swap curve on a periodic basis so that the duration of the received cash flows is held constant.
In general, a flattening or an inversion of the yield curve after the swap is in place will improve the constant maturity rate payer's position relative to a floating rate payer. In this scenario, long-term rates decline relative to short-term rates. While the relative positions of a constant maturity rate payer and a fixed rate payer are more complex, in general, the fixed rate payer in any swap will benefit primarily from an upward shift of the yield curve.
For example, an investor believes that the general yield curve is about to steepen where the six-month LIBOR rate will fall relative to the three-year swap rate. To take advantage of this change in the curve, the investor buys a constant maturity swap paying the six-month LIBOR rate and receiving the three-year swap rate.
Constant Maturity Credit Default Swaps
A constant maturity credit default swap (CMCDS) is a credit default swap which has a floating premium that resets on a periodical basis, and provides a hedge against default losses. The floating payment relates to the credit spread on a CDS of the same initial maturity at periodic reset dates. The CMCDS differs from a plain vanilla credit default spread in that the premium paid by the protection buyer to provider is floating under the CMCDS, not fixed as with a regular CDS.
The One-Year Constant Maturity Treasury
The one-year constant maturity Treasury (CMT) is the interpolated one-year yield of the most recently auctioned 4-, 13-, and 26-weekU.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 theoff-the-run Treasuriesin the 20-year maturity range.
FAQs
Constant maturity is the theoretical value of a U.S. Treasury that is based on recent values of auctioned U.S. Treasuries. The value is obtained by the U.S. Treasury on a daily basis through interpolation of the Treasury yield curve which, in turn, is based on closing bid-yields of actively-traded Treasury securities.
What is the 10 year Treasury constant maturity rate today? ›
Basic Info. 10 Year Treasury Rate is at 4.54%, compared to 4.46% the previous market day and 3.80% last year.
What is maturity in Treasury? ›
When a Treasury bond matures – meaning it has reached its maturity date and expires – the investor is paid out the full face value of the bond. So if the bondholder holds a Treasury bond worth $10,000, he or she will receive the $10,000 principal back, as well as earning interest on the investment.
What is the three year Treasury constant maturities rate? ›
3 Year Treasury Rate is at 4.61%, compared to 4.62% the previous market day and 3.98% last year.
What is the 20 year Treasury constant maturity rate? ›
Basic Info. 20 Year Treasury Rate is at 4.65%, compared to 4.68% the previous market day and 4.09% last year. This is higher than the long term average of 4.36%. The 20 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 20 years.
What is the one year Treasury constant maturity rate forecast? ›
The United States 1 Year Government Bond Yield is expected to be 5.583% by the end of September 2024.
Are treasury bills better than CDs? ›
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
What is the average return on 10 year Treasury bonds? ›
10 Year Treasury Rate is at 4.69%, compared to 4.63% the previous market day and 3.59% last year. This is higher than the long term average of 4.25%.
How much does a $1000 T bill cost? ›
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
Do Treasuries pay interest at maturity? ›
Treasury bonds are government securities that have a 20-year or 30-year term, and they pay a fixed interest rate on a semi-annual basis. They earn interest until maturity and the owner is also paid a par amount, or the principal, when the Treasury bond matures.
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT. Investors can opt to have up to 50% of their Treasury bills' interest earnings automatically withheld.
What happens when a Treasury bill matures on TreasuryDirect? ›
We sell Treasury Bills (Bills) for terms ranging from four weeks to 52 weeks. Bills are sold at a discount or at par (face value). When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
What are constant maturity Treasuries? ›
It's a measure of value that is designed to illustrate the one-year yield equivalent (how much you might expect to earn in interest from these investments each year) of the most recently auctioned Treasury securities. CMT rates may also be expressed in the form of 3, 5 and 10 year equivalents.
What is the 6 month Treasury constant maturity rate? ›
6 Month Treasury Rate (I:6MTCMR)
6 Month Treasury Rate is at 5.42%, compared to 5.42% the previous market day and 5.44% last year. This is higher than the long term average of 2.84%.
How often do 3 year Treasury notes pay interest? ›
Notes are relatively short or medium-term securities that mature in 2, 3, 5, 7, or 10 years. Both bonds and notes pay interest every six months. The interest rate for a particular security is set at the auction.
What is the average maturity of Treasury Bonds? ›
Historically a 30-year investment, Treasury Bonds are now offered in 20-year terms, as well.
What is the constant maturity price? ›
A constant-maturity price series indicates, for each time t, an interpolated price reflecting a specific time-to-expiration that is constant over time.
What is the constant maturity return? ›
How are the returns of SBI Magnum Constant Maturity Fund?
| 1Y | 3Y | Since Inception |
|---|
| 6.34% | 4.88% | 7.76% |
The "yield to maturity" is the annual rate of return on the security. In both examples, the yield is higher than the interest rate. Therefore, the price was lower than par value. During the life of the bond or note, you earn interest at the set rate on the par value of the bond or note.
