The government has lots of different debt instruments trading at any given time. It has short-term stuff, bills with maturities of a year or less. It has medium-term stuff, notes with maturities in the two-year-to-ten-year range. And it has long-term instruments, like the 30-year Treasury bond.
Each maturity length has a different interest rate. Typically, the longer the maturity, the higher the rate. With all these different maturities, it's hard to approximate a general picture of Treasury rates.
You can use one maturity as a benchmark (the 10-year or the 30-year, for instance). But that ignores what's going on at all the other maturity levels. How do you boil everything down to a single number? That goal represents the purpose of the One-Year Constant Maturity Treasury.
It's a stat published by the Federal Reserve, providing a one-number-to-rule-them-all figure to describe the overall Treasury situation. The Fed uses the monthly average yield for the Treasury securities to come up with an adjusted figure, putting all the maturities into a one-year context. These figures then get compiled into the 1-year CMT number.
The index is often used as a benchmark for other types of lending. For instance, it can be used as a basis for changes in adjustable-rate mortgages.
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Finance: What are Treasury Bills?15 Views
finance a la shmoop. what are Treasury bills? well the US government is a
financial pig. it borrows money all the time [pig crosses screen]
snort snort. well somebody's gotta buy vibrating back massagers for all those
senators. tea bills are just one way in which the government raises cash for
itself to you know buy things. the deal works like this.
investors write a check to the US government taking their hard-earned cash
and giving it to Uncle Sam who in return gives them a piece of paper promising to
pay them back in a short ish period of time .while tea bills are like that
they're typically short in duration and they sell at a discount to par like a
zero coupon bond .meaning that an investor might pay nine hundred eighty [zero coupon bonds explained]
two dollars for a thousand dollar par bond which comes due in six months. the
investor for loaning the government her nine hundred eighty two dollars in cash
for six months gets paid eighteen dollars in rent on that money. there are
no interest payments made along the way as there would be in a traditional bond
investment which typically pays interest twice a year. in this case the investor
is just buying a grand at a discount. simple .and note that in this case the
investment return is eighteen bucks on a grand for six months. that implies an
annualized interest rate on the money ie over twelve months of what? mm-hmm we're [equation]
testing you here a little bit just seeing if you're awake. well if an
investor makes eighteen bucks in six months which is half a year if you
doubled the six months to be twelve months or a full year well you could
also double the eighteen bucks to be thirty-six bucks and yeah that's it.
notionally had the government rented that grand for a year it would have paid
thirty-six dollars for the privilege or three point six percent interest
annualized. thirty-six bucks over a grand. that's how we got there but it's not
quite accurate why? because the investor didn't put in a full grand ,they will
have put in less. well in this example they invested nine hundred eighty two
dollars and they got back eighteen bucks for six months of doing a whole lot of [piggy bank called "U.S gov."]
nothing. watching the clock and hoping the US
government wouldn't go bankrupt during that time period. so the interest rate of
return to the investor? well you take 18 bucks and divide it by 982 and you get
about 1.8 3% annualize it and you get a skosh more than 3.6 percent ie something
more like three point six six percent or so .small change but on big numbers that
adds up and now with investor money the government is free to do all its pork
spending. maybe a nice new sty for the Speaker of the House. what do you think? [pig walks on back legs through a store carrying a basket]
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Spread to treasuries is an indication of risk associated with a given debt or bond offering.