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
3.245 %

Highlights
The Treasury's $24 billion 2-year note auction appeared routine on the surface, with a 2.01 bid-to-cover right at the ratio's 12-month average and a 3.245 percent high yield right at the when-issued rate at the 1:00 p.m. ET bidding deadline.

But demand from retail customers and foreign central banks may have been soft as indirect bidders totaled only 29.7 percent of accepted competitive bids. The level is the lowest in the short history of these data and follows a weak 34.0 percent at the December auction.

Low participation from indirect bidders is certain to raise talk whether demand for short-term notes is beginning to dry up -- a natural response to prospects of further and sustained increases in the Federal Reserve's overnight policy rate.

Demand has yet to weaken for long-term notes, specifically the Treasury's 10-year note. The play between the 2-year note and 10-year note may be one of the biggest financial stories of 2005.

Trends
[grid]
[Chart] 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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