What Is the Treasury Index?

The Treasury Index Explained in Less Than 5 Minutes

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The Treasury index is an index that measures the recent auctions of actively traded U.S. Treasury securities. It is commonly used by lenders as a benchmark when determining interest rates.

Learn how the U.S. Treasury index works, the different types, and how it can affect your investment and financing decisions.

Definition and Examples of the Treasury Index

The Treasury index is an umbrella term for the various indices that are based on the auctions of U.S. Treasury securities, such as Treasury bills (T-bills), Treasury notes (T-note), and Treasury bonds (T-bonds).  Examples of Treasury indices include the yields from five- and 10-year Treasury securities. The U.S. Treasury index is also used as a benchmark for interest rates on various loan products, including mortgages and commercial financing.

The Small Business Administration (SBA) 504 loan program, for example, has its interest rates pegged to five-year and 10-year U.S. Treasury issues. The final interest rate is typically calculated by using the index as a base rate, plus a certain margin.

How Does the Treasury Index Work?

The U.S. government issues debt instruments, such as T-notes and T-bonds, to raise revenue for public services and to pay national debt interest. The U.S. Treasury index is based on the recent auctions of these U.S. Treasury securities. 

Prices and yields on U.S. treasuries have an inverse relationship. When prices go up, the yield goes down. When prices are down, the yield goes up. Yield curve rates are updated daily on the Treasury’s interest rate websites. 

The yield curve is often used to gauge the market’s current performance, with the 10-year T-note in particular as an indicator of investor confidence, as it falls in the middle of the curve.

When the yields are higher on long-term Treasurys, it suggests an optimistic outlook on the future economic state. Investors may feel they can handle more risk and take on higher-returning investments. When yields are lower, prices increase because there is increased demand for T-securities, which are considered safer investments. 

The U.S. Treasury Index and Interest Rates

Lenders use the Treasury index as a benchmark when calculating interest rates on certain loans. They typically charge a base rate based on the Treasury index plus a certain margin. Lenders charge this additional margin, or “markup,” in order to increase their compensation—otherwise, they would simply invest in risk-free Treasury securities.

Lenders often use a Treasury index that is comparable to the maturity on the loan they’re offering. The interest rate on a five-year consumer loan, for instance, may be based on the current rate on five-year U.S. Treasuries. 

Housing markets are influenced by Treasury indices, too. The interest rates on adjustable-rate mortgages, for example, can change annually. For this reason, mortgage lenders may use the rates on one-year constant-maturity Treasury (CMT) securities as a benchmark for setting the interest rate.

Types of Treasury Indices

There are several types of Treasury indices, including:

Daily Treasury Yield Curve Rates

Commonly called “Constant Maturity Treasury” rates, this index is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. The yields are derived from maturities ranging from six months to 30 years.

Daily Treasury Real Yield Curve Rates

Also called “Real Constant Maturity Treasury” rates, this index reflects the real yields on Treasury Inflation Protected Securities (TIPS) at fixed maturities of five, seven, 10, 20, and 30 years. It uses the calculations of secondary market quotations by the Federal Reserve Bank of New York.

Daily Treasury Bill Rates

This index compiles the daily secondary market quotation on the most recently auctioned new T-bills for varying maturities, including four-week, eight-week, 13-week, 26-week, and 52-week.

Daily Treasury Long-Term Average Rates

This index has evolved over time to reflect the concurrent changes in the eligible long-term bond market. It currently measures a 30-year constant maturity rate. From 2006-2004 the index published a 20-year constant maturity with an extrapolation factor to estimate a theoretical 30-year rate. This replaced the method from 2002-2004 which replaced the average of bid yields on outstanding fixed-coupon securities that had 25 years or more remaining before they matured.

Alternatives to the Treasury Index

Like the Treasury index, lenders use the London Interbank Offered Rate (LIBOR) as a benchmark when determining interest rates on various debt instruments, such as loans and bonds. This index has been used since the 1960s. The LIBOR is calculated by polling over a dozen large global banks in London about the interest rates they can borrow for different terms. 

The LIBOR is scheduled to be discontinued between Dec. 31, 2021, and June 30, 2023.

What It Means for Individual Investors

Treasury securities are considered among the safest investments. Whether in times of recession, inflation, or war, the U.S. government is highly likely to repay its bondholders. The income earned from Treasury securities may also be exempt from state and local taxes.

Key Takeaways

  • The U.S. Treasury index refers to various indices that are based on the most recent auctions of U.S. Treasury securities, such as bills, bonds, and notes.
  • Lenders often refer to various U.S. Treasury indices as benchmarks for setting interest rates.
  • U.S. Treasury Indices are sometimes used as an indicator of the economy’s overall health.
  • The yield and price on Treasury securities have an inverse relationship—when prices go up, the yield goes down and vice versa.
  • Treasury securities tend to make safe investments because they are fully backed by the U.S. government.