Treasury 2-Year Note Auction Attracts Highest Demand in 6 Months

The Treasury sold $32 billion of two-year notes at the highest demand since April, less than two weeks after a partial government shutdown raised concern of a U.S. default.

The notes were sold at a yield of 0.323 percent, the lowest level at an auction of the security since May. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.32, compared with an average of 3.3 for the past 10 sales and the highest since April. Federal Reserve policy makers begin a two-day meeting tomorrow amid forecasts they will refrain from cutting stimulus.

“It’s an indication that Treasury debt is still of interest, particularly at this part of the curve,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “It is representative still of uncertainty over the direction of the economy in general, and Fed monetary policy and the uncertainty ahead, the political issues that we still face.”

The yield on the current two-year note maturing in September 2015 was steady at 0.303 percent, as of 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The price of the 0.25 percent security was little changed at 99 28/32,.

The yield on the benchmark 10-year note rose one basis point to 2.52 percent, Bloomberg Bond Trader data showed. The price of the 2.5 percent note due in August 2023 fell 1/8, or $1.25 per $1,000 face amount, to 99 25/32.

The seven-day relative strength index for the Treasury 10-year note yield rose to 35 from 29.9 on Oct. 25, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

Volatility Falls

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was at $204 billion, below the 2013 average of $314 billion. Volume reached a 2013 high of $662 billion on May 22 and a low of $147.8 billion on Aug. 9.

Volatility in Treasuries as measured by the MOVE index dropped to 58.54, the lowest level since May. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.

The bid-to-cover was 3.09 on the Sept. 24 auction of two-year notes, the last sale of the securities before the 16-day partial government shutdown that began on Oct. 1.

Dealer Demand

Investors dumped the shortest maturity U.S. government debt during the shutdown as lawmakers were at odds over extending the nation’s debt ceiling on concern principle and interest payments would be delayed or defaulted on if a budget agreement wasn’t reached.

“There was a strong reception to the auction, with strong nondealer demand,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We have ongoing uncertainty, policy still headed into the end of the year, and the economic data, while delayed, certainly hasn’t been robust, which continues to underpin demand in the front end.”

Today’s auction yield compared with a forecast of 0.322 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the notes, the most since July, compared with an average of 23 percent for the past 10 sales.

‘Good Start’

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 31 percent of the notes at the sale, the most since February, compared with an average of 22 percent for the past 10 auctions.

“The auction went quite well,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Fed. “It’s a really good start to the week.”

The U.S. will sell $35 billion in five-year debt tomorrow and $29 billion in seven-year securities on Oct. 30.

Two-year notes have gained 0.3 percent this year, compared with a decline of 1.8 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year notes returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.

“Yields have richened pretty significantly, we’ve had a good run, and now investors are waiting for better prices to jump back in with gusto,” Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the primary dealers required to bid at Treasury auctions, said before the results were final.

U.S. central bankers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of responses in a Bloomberg News survey of economists.

The Bloomberg U.S. Treasury Bond Index has declined 1.8 percent for the year through Oct. 25. Japanese bonds gained 2.5 percent, while Germany’s lost 1.4 percent.

Before it's here, it's on the Bloomberg Terminal.