Econoday Report: 2-Year Note Auction 24, 2005

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

3.498 %

Highlights
The Treasury's monthly 2-year auction proved bumpy Thursday, sold at a high yield of 3.498% that was a full basis point over the when-issued note at the bidding deadline.

The bid-to-cover was on the soft side at 1.93 vs. a 12-month average of 2.07.

Also on the soft side was bidding from retail customers and foreign central banks, the latter a sensitive topic following the Bank of South Korea's decision this week to diversify its holdings. Indirect bidders totaled only 31.8% of accepted competitive bids, better than last month's 29.7% but still soft compared to a long-term average of 41%.

Still the results are respectable given the steady climb in yields underway at the short-end of the market.

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