The Monthly Treasury Average (MTA) is an interest rate index that is calculated using the Moving Average (MA) of Treasury bonds with a maturity of one year that is constant over the previous 12 months (one-year CMT).

Monthly Treasury Average

The MTA serves as the foundation upon which interest rates for certain mortgages with adjustable rates are established (ARMs). The MTA Index, which is also referred to as the 12-MAT, is a lagging indicator. This means that it begins to shift only after the economy has started to follow a particular pattern or trend.

•The Monthly Treasury Average, also known as MTA, is a rates index that is calculated using the 12-month moving average of one-year constant maturity Treasuries.

The MTA is utilized to determine the interest rate that will be applied to loans with adjustable rates, such as ARMs.

Because it is based on an annualized lagging moving average, the MTA will typically be distinct from the most recent one-year CMT or one-year LIBOR. This is because the MTA uses an annualized lagging moving average.

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Understanding the Monthly Treasury Average Index

The index is computed by first adding the twelve most recent monthly CMT interest or yield values and then dividing that sum by twelve. This yields the index value. The implied yield for one year on the most recently auctioned bills, notes, and bonds issued by the United States Treasury is referred to as the one-year constant maturity Treasury (one-year CMT).

The current MTA value will be lower than the current CMT value when the values of the twelve-monthly CMT are sequentially increasing. On the other hand, if the values of the CMT continue to drop from month to month, the MTA will appear to be higher than the current CMT. This inverse relationship has the result of making the MTA Index smoother, or less volatile, than other interest indexes, such as one-month LIBOR or the CMT itself. This effect is caused by the fact that the MTA Index and the CMT are both negatively related.

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It is possible for there to be a significant gap between the MTA, CMT, and various other indexes during periods of extreme interest rate volatility. During the late 1970s and early 1980s, for instance, when interest rates were in the double digits and fluctuating widely, the MTA Index frequently differed from the CMT rate by as much as four percentage points. This was especially common during the latter part of the decade.

It is important to keep in mind, however, that the difference may be either higher or lower depending on the direction in which rates were moving at the time the average calculation was performed. The MTA Index was set at 0.26%, the CMT was set at 0.1%, and the one-month LIBOR index was set at 0.13% in January 2021.

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Picking the Right Index for Your Mortgage

Borrowers can select an index of their choosing with certain types of mortgages, such as adjustable-rate mortgages (ARMs) with payment options. The selection of the index ought to be done after conducting some research into the various possibilities. Even though the MTA index is typically lower than the one-month LIBOR by a margin of about 0.1 percentage point to 0.5 percentage point, the lower rate of an MTA, when combined with a payment cap, has the potential to result in a situation where the amortisation of the loan is negative. When using negative amortisation, the monthly payment is intended to be lower than the total amount of interest that has accrued due to the loan. In this scenario, any interest that is accrued but not paid is added to the principal balance, which then becomes subject to additional interest charges in the months that follow. Due to the fact that it has a lagging effect, the MTA will incur higher costs during times when interest rates are declining.

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The London Interbank Offered Rate (LIBOR) is being phased out because recent scandals and questions surrounding its validity as a benchmark rate. The Secured Overnight Financing Rate will take the place of the London Interbank Offered Rate (LIBOR) as of the 30th of June in 2023, as stated by the Federal Reserve and the regulators in the United Kingdom (SOFR). Following the conclusion of this phase-out process on December 31, 2021, the LIBOR one-week and two-month USD LIBOR rates will no longer be published.

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The interest rate that applies to a mortgage loan with a variable rate is referred to as the fully indexed interest rate. The value of the index is equal to this rate, which also includes a margin. Although the index changes over time, the margin always remains the same throughout the duration of the mortgage.

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When determining which index will result in the greatest financial savings, be sure to factor in the margin amount. When one index is lower in comparison to another index, the likelihood of the margin being larger increases. A margin in the amount of 2.5% is typically included in a mortgage that is pegged to the MTA Index.

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