Econoday Report: 2-Year Note Auction 30, 2005

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2005 U.S. Economic Events & Analysis

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2-Year Note Auction

Definition
Treasury notes are sold at regularly scheduled public auctions. Competitive bids at these auctions determine the interest rate paid on each Treasury note issue. Twenty-two primary dealers (as of August 2004) are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold, resell, or trade the securities with other firms. The Treasury usually announces the size, date and time of the monthly two-year note auction on the third or fourth Monday of each month, with the auction taking place two days later. The 2-year note is issued (settled) on the last day of the month. In the event of the last day falling on a weekend or holiday, the security is settled on the first business day of the subsequent month. Why Investors Care

Yield Awarded

3.860 %

Highlights
The Treasury's $24 billion 2-year auction came in on the soft side. The high yield was 3.860%, a bit above the when-issued note at the bidding deadline. But the bid-to-cover was solid enough at 2.03, a bit below the 12-month average but above last month's 1.93.

Indirect bidders showed moderate interest. This category includes foreign central banks, namely Asian central banks. Indirect bidders represented 30.6% of accepted competitive bids, below the 12-month average but right at percentages in February and January.

The bond market dipped slightly in reaction to the results, which aren't that bad. New supply always weighs on bonds. Next up for the Treasury market is Friday's employment report.

Trends

When the 2-year note is higher than the federal funds rate, it usually suggests that bond investors are expecting the federal funds rate to rise. Conversely, when the 2-year note is lower than the fed funds rate, it suggests that investors are anticipating a rate cut.

Data Source: Haver Analytics

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