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
3.650 %

Highlights
Demand proved unusually weak for the Treasury's monthly 2-year auction as the approach of next week's Federal Reserve policy meeting may have made investors cautious.

The high rate on the $24 billion auction was 3.650%, a full 2 basis points above the when-issued note at the bidding deadline. The bid-to-cover was a very soft 1.77.

Demand from non-dealers was perhaps the worst news, as indirect bidders represented only 25.4% of accepted competitive bids, the lowest total in the short history of this reading.

The results may raise a few eyebrows ahead of next month's Treasury refunding. But once the FOMC meeting is out of the way, buyers are likely to return in force as usual. Bonds dipped in reaction to today's results.

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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