U.S. 2-Year Note Auction Draws Highest Indirect Bid Since June

The U.S. sale of $32 billion of two-year notes drew the strongest demand in eight months from a class of investors that includes foreign central banks on bets the Federal Reserve will maintain record low interest rates.

Indirect bidders bought 34.3 percent of the sale, the most since June. The average at the past 10 auctions was 25.4 percent. The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.6, above the average of 3.3 for the past 10 sales. The notes sold at a yield of 0.34 percent, the lowest since November. Traders see a 93 percent chance the Federal Open Market Committee will hold its target rate steady through 2014, according to futures data compiled by Bloomberg.

“The two-year note auction was strong and pretty routine,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that are obligated to bid at U.S. debt sales. “The Fed and its policies are still the biggest force that keeps cash in the front end of the market. Central banks around the world continue to crave front-end debt and, headed into the end of the month, there is still a lot of money in the market to be put to work.”

The yield on the current two-year note was little changed at 0.31 percent at 2:12 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the 10-year note dropped four basis points to 2.7 percent.

Taper Expectations

Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since December 2008. The central bank reduced bond-buying under its quantitative-easing stimulus strategy by $10 billion a month in January and again in February, citing economic improvement. It now purchases $65 billion a month. The Fed buys the debt to hold down borrowing costs and fuel economic growth.

Two-year notes have returned 0.2 percent this year, compared with a gain of 1.4 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year securities gained 0.3 percent in 2013, while Treasuries fell 3.4 percent.

The yield on the notes sold today compared with a 0.341 percent forecast in a Bloomberg News survey of six of the Fed’s primary dealers.

Bidder Participation

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.3 percent of the notes at the sale, the weakest since July. This compares with an average of 22.3 percent at the past 10.

“The two-year note auction showed relatively typical strength from the non-dealer community,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Given the Fed’s commitment to keeping the fed funds rate lower for longer, the bid in the front end and the strong receptions to auctions will continue to be a mainstay for the foreseeable future.”

Today’s offering is the first of four auctions of coupon-bearing debt this week. The Treasury will sell tomorrow $13 billion in two-year floating-rate notes and $35 billion five-year securities. It will auction $29 billion of seven-year notes on Feb. 27.

When added to a $9 billion sale of 30-year Treasury Inflation Protected Securities on Feb. 20, the auctions total $118 billion. They will raise $49.1 billion of new cash, as maturing securities held by the public total $68.9 billion, according to the U.S. Treasury.

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