U.S. 2-Year $35 Billion Auction Attracts Fewest Bids Since 2011

Treasury’s $35 billion sale of two-year debt attracted the fewest bids for the securities since February 2011 after reports showed stronger-than-forecast economic data, damping demand for refuge assets.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.04, compared with an average of 3.72 for the past 10 sales. The benchmark 10-year note yield rose earlier after a report showed consumer confidence in May reached the strongest in more than five years while Federal Reserve Chairman Ben S. Bernanke said last week the central bank could cut the pace of asset purchases if officials see indications of sustained improvement in economic growth.

“It was a disappointing auction,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that are obligated to bid at U.S. government debt offerings. “Everyone’s scared of catching a falling knife.”

The current two-year note yield climbed four basis points, or 0.04 percentage point, to 0.29 percent in New York, according to Bloomberg Bond Trader data. The 0.125 percent note due April 2015 slid 2/32, or 63 cents per $1,000 face amount, to 99 22/32.

The 10-year yield reached 2.17 percent, the highest level since April 6, 2012.

Note Auction

At the auction, the two-year notes drew a yield of 0.283 percent, compared with a forecast of 0.277 percent in a Bloomberg News survey of seven primary dealers.

Non-primary dealers bought the fewest of the $35 billion two-year notes since April 2009, with indirect bidders, an investor class that includes foreign central banks, purchasing

21.9 percent of the notes, and direct bidders buying 12.6 percent, the least since July.

Indirect bidders have averaged winning 24.7 percent for the past 10 sales while direct bidders have won an average 24.5 percent of the last 10 offerings. Primary dealers were awarded

65.5 percent of the offering.

“They got more than they expected, and that’s usually a bad sign for price action following the auction,” Kohli said.

Two-year notes have gained 0.1 percent this year, compared with a decline of 0.5 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.

The offering was the first of three note auctions this week totaling $99 billion. The government will sell $35 billion in five-year debt today and $29 billion in seven-year securities tomorrow.

The sales, including the Treasury Inflation Protected Securities offering last week, will raise $53.54 billion of new cash, as maturing securities held by the public total $58.46 billion, according to the U.S. Treasury.