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-three primary dealers (as of July 2006) 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
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Highlights
Results were mixed for the Treasury's monthly 2-year note auction, a large $20 billion offering this month. Bid-to-cover was 2.86 which is below those in the $18 billion auctions of September and August but is still strong. The award rate of 3.723 percent was also a positive, a bit below expectations at the bidding deadline.
But much of the bidding was from dealers, a bad sign for underlying demand. Indirect bidders made up a very light 23 percent of the $19.4 billion in accepted competitive bids, this is the lowest on the books and compares with a 37 percent average. Note that the coupon on the issue is 3-5/8 percent, the lowest since June 2005 and a reminder of how recent events in the credit market have changed the economic and interest-rate outlooks.
Investor demand for Treasuries has been very strong, made stronger by trouble in the credit markets and expectations for further Federal Reserve action. Despite the very light interest from non-dealers, there was little reaction to the auction results.
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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. |
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