U.S. Sells $35 Billion of Two-Year Notes

A U.S. sale of $35 billion of two-year notes drew weaker-than-average demand that almost matched the lowest level since 2011 after economic data bolstered the case for the Federal Reserve to reduce monetary stimulus.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.05 at yesterday’s auction, compared with an average of 3.63 for the past 10 sales. It was 3.04 at the May offering, the lowest since February 2011. The yield at the sale yesterday was 0.430 percent, the highest since May 2011, exceeding the forecast in a Bloomberg survey of seven Fed primary dealers for 0.423 percent.

“It’s fair to say that people were less than willing to step up and provide sponsorship for the auction,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. Overall demand was “relatively lackluster,” he said.

The current two-year note yield climbed two basis points, or 0.02 percentage point, to 0.41 percent yesterday in New York, according to Bloomberg Bond Trader data. The price of the 0.25 percent note due in May 2015 declined 1/32, or 31 cents per $1,000 face amount, to 99 22/32.

Treasuries fell yesterday as reports showed gains in U.S. new-home sales, durable-goods orders and consumer confidence. Fed Chairman Ben S. Bernanke said last week policy makers may reduce bond buying under their quantitative-easing stimulus strategy this year and end it in mid-2014 if economic growth is in line with their projections.

Fed Forecasts

Bernanke spoke to reporters June 19 after a two-day meeting of the Federal Open Market Committee. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014. The Fed has been buying $85 billion of bonds every month to put downward pressure on borrowing costs in its third round of asset purchases since 2008.

Indirect bidders, an investor class that includes foreign central banks, bought 35.8 percent of the two-year notes, the most since February 2012. That compared with an average 23.8 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 7.8 percent, the fewest since April 2012, versus an average of 24.8 percent at the past 10 sales.

Two-year notes have lost 0.1 percent this year through June 24, versus a drop of 2.9 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. Two-year securities returned 0.2 percent in 2012, while Treasuries overall gained 2.2 percent.

The auction was the first of three note offerings 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 will raise $40.7 billion of new cash, as maturing securities held by the public total $58.3 billion, according to the U.S. Treasury.

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