Treasury Index

[agape]

A buddy of mine told me that the treasury index is used to determine the interest rate changes for certain ARMs. What is it and how does it work?

[tiara]

The treasury index is based on the results of auctions the US Treasiury holds for its Tbills and securities or is derived from the US Treasury daily yield curves which is based on the closing market bid yields on actively traded treasury securities in the otc market.

[admin]

To add to what tiara said the index is considered in the financial world as the risk free interest rate. It is considered risk free because the United States government has never defaulted on a loan. These Tbills or bonds issued by the United States federal government are basically a loan given to the government.

So, lenders base the interest rate they charge to home buyers on a certain amount above what the risk free interest rate is. And so that is how the Tbill index affects home loans.