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What it means: This index is an average of the monthly one-year Treasury adjusted to constant maturity for the past 12 months. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.
How it's used: It's an index that is used to set the cost of variable-rate loans, particularly adjustable-rate mortgages (ARMs). Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Since this index is an annual average of the monthly one-year CMT yield, it is less volatile than other indexes that are not smoothed out over such an extended period of time, such as the monthly one-year CMT.