Econoday Report: 2-Year Note Auction 27, 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

3.975 %

Highlights
July's two-year note auction proved routine, sold at a high rate of 3.975% to match the when-issued note at the bidding deadline. The bid-to-cover at 2.38 was a bit on the strong side, reflecting the smaller $20 billion offering size. Note in the table below the change in the rate since last month -- more than 30 basis points and reflecting a higher risk of Fed rate hikes. Bidding by non-dealers was moderate as indirect bidders made up 34.8% of accepted competitive bids, a bit below average.

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