Econoday Report: 2-Year Note Auction 26, 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

4.365 %

Highlights
The U.S. Treasury auctioned $20 billion of 2-year notes today with a coupon rate of 4.25 percent and a high yield of 4.365 percent.. Demand for this issue was down slightly from the previous month, given the lower bid-to-cover ratio, although this ratio remained higher than its long term average. This issue may not be considered a strong success -- given that the high yield is higher than expectations (4.357 to 4.60) prior to the auction.

Interest rates have generally picked up in the past several weeks, to some extent reflecting uncertainty over the actions of the next Fed chairman. Nominee Ben Bernanke has developed a reputation as an inflation-dove since he had voiced his concerns about deflation back in 2003. It is our belief that the dove-moniker is inappropriate, but bond investors are cautious as a bunch when it comes to inflationary worries.

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