Econoday Report: 2-Year Note Auction 29, 2007

2007 U.S. Economic Events & Analysis

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2-Year Note Auction

Definition
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

Yield Awarded

4.115 %

Highlights
Uncertainty in the financial markets and still very strong flight-to-safety demand made for exceptional results for the Treasury's August auction of 2-year notes. The $18 billion offering posted a very, very strong bid-to-cover ratio of 3.97 with non-dealers, such as insurance companies and pension funds, making up a solid 33 percent of the $17.144 million in accepted competitive bids for the biggest percentage since the April auction. The high yield of 4.115 percent was nearly 2 basis points below the when-issued rate at the 1:00 p.m. ET bidding deadline, another exceptional result for the auction. Non-competitive bids totaled $856 million, well up from $698 million in July and perhaps an indication that individual investors are as cautious as institutional investors. Treasuries rallied in immediate reaction to today's results.

Trends

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.

Data Source: Haver Analytics