Monthly Treasury Average (MTA) Index: What It Means, How It Works

What Is the Monthly Treasury Average (MTA) Index?

The Monthly Treasury Average (MTA) is an interest rate index derived from the 12-month moving average (MA) of one-year constant maturity Treasury bonds (one-year CMT). 

The MTA acts as the basis to set interest rates for some adjustable-rate mortgages (ARMs). The MTA Index, also known as the 12-MAT, is a lagging indicator that changes after the economy has begun to follow a particular pattern or trend.  

Understanding the Monthly Treasury Average Index

The calculation for the index comes from adding the twelve most recent monthly CMT interest or yield values and dividing by twelve. The one-year constant maturity Treasury (one-year CMT) is the implied, one-year yield of the most recently auctioned U.S. Treasury bills, notes, and bonds.

When the twelve-monthly CMT values are sequentially increasing, the current MTA value will be lower than the current CMT value. Conversely, when the CMT values fall month after month, the MTA will appear higher than the current CMT. This inverse relationship has the effect of making the MTA Index smoother, or less volatile, than other interest indexes, such as the one-month LIBOR or the CMT itself.

In times of extreme interest rate volatility, the difference between the MTA, CMT, and other indexes can be substantial. For example, during the late 1970s and early 1980s, when interest rates were in the double digits and fluctuating widely, the MTA Index often differed from the CMT rate by as much as four percentage points. 

Note, however, that the difference could be either up or down, depending on the direction rates were flowing at the time of average calculation. In June 2023, the MTA Index was pegged at 4.43%; the CMT was at 5.24%.

Choosing an Index for a Mortgage

Some mortgages, such as payment option ARMs, offer the borrower a choice of indexes. Choosing the index should be with some analysis of the available options. While the MTA index is typically lower than the one-month LIBOR by about 0.1% to 0.5%, the lower rate of an MTA, combined with a payment cap, has the potential to cause a negative amortization situation. In negative amortization, the monthly payment is less than the interest owed on the loan. In that case, unpaid interest adds to the principal, which is subject to more interest in the following months. Also, in periods of falling interest rates, the MTA will cost more due to its lagging effect.

The interest rate on an adjustable-rate mortgage is known as the fully indexed interest rate. This rate equals the index value, plus a margin. While the index is variable, the margin is a fixed value for the life of the mortgage. 

When considering which index is most economical, do not forget to add in the margin amount. The lower an index relative to another index, the higher the margin is likely to be. A mortgage pegged to the MTA Index typically includes a margin of 2.5%.