Constant Maturity (Treasury Security) - Explained
What is Constant Maturity?
Written by Jason Gordon
Updated at October 4th, 2021
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Table of Contents
What is Constant Maturity?How Does Constant Maturity Work?Constant Maturity SwapsConstant Maturity Credit Default Swap (CMCDS)What is Constant Maturity?
Constant maturity refers to a representation of maturity determined by the yield of various Treasury securities that have different maturity periods. The Federal Reserve Board uses constant maturity to generate an index for the average yield of these securities which serve as a point of reference for the pricing of debt securities issued by entities.
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How Does Constant Maturity Work?
In the United States, the Treasury Department represents the yield on a U.S. Treasury bill, note, or bond is issued on that same day using constant maturity. As used by the US treasury, constant maturity gives the values of yields of treasury securities. The Treasury Department publishes these rates on a daily basis and the rate is calculated using the daily yield curve these securities. Lenders also use constant maturity yields to determine mortgage rates. The Index computed by the Treasury Department serves as a reference point for lenders.
Constant Maturity Swaps
Constant maturity SWAPS (CMS) refers to the variation of the regular interest rate swap where the interest rate on one leg is reset periodically against the rate of the fixed maturity instrument. The interest rate on one leg of reset in reference to the market swap and not LIBOR while the other leg of the interest swap is that of LIBOR. Through the CMS, a purchaser can fix the duration of received flows on a swap where the rate on one leg of the constant maturity swap is fixed (reset periodically) relative to a floating reference index such as LIBOR. This floating leg is reset periodically against the rate of a fixed maturity instrument.
Constant Maturity Credit Default Swap (CMCDS)
A constant maturity credit default swap (CMCDS) is a type derivative instrument that is similar to the standard credit default swap. A CMCDS has a floating premium that is reset periodically to protect against default losses. On the other hand, a regular CDS has a fixed premium and offers a default protection.