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

4.014 %

Highlights
The U.S. Treasury auctioned $20 billion of 2-year notes today with a coupon rate of 4 percent and a high yield of 4.014 percent. Bond investors were forecasting a 4.01 percent high yield with a range of 4.005 to 4.02 percent. This certainly fell within expectations and should be viewed relatively favorably by the bond market. The bid-to-cover ratio dipped in August from July, but remains above the long term average and thus can be viewed favorably. However, it is worth considering that the size of the 2-year auctions have been smaller during the summer months (at $20 billion per month) compared to earlier in 2005 and in previous years as well.

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