Treasury auction’s success reflects economic worries
Investor demand was ravenous Tuesday at a Treasury auction of $40 billion in new two-year notes.
That’s good news for the federal government’s pocketbook but a bad sign for the U.S. economy: It suggests many investors again are looking for a hiding place, fearful that growth will fizzle in the second half of the year.
Uncle Sam got $3.45 in bids for every $1 in two-year notes offered, the highest so-called bid-to-cover ratio since October.
The note sale “knocked the cover off the ball,” said George Goncalves, head of U.S. interest-rate strategy at Nomura Securities in New York.
The annualized yield on the notes sold was 0.74%, down from 0.77% at a May auction of two-year notes. Investors continued to pour into Treasuries after the sale, driving the yield on previously issued two-year notes to 0.67%, the lowest since December.
Longer-term Treasury yields also slumped Tuesday, reinforcing economic concerns. The 10-year T-note yield fell to 3.16% from 3.24% on Monday, nearing its one-year low of 3.14% reached June 7.
Bond analysts said the National Assn. of Realtors’ weak report on May sales of existing homes added to worries that the housing market could drag the economy down again, risking a dreaded “double dip” recession.
Tom Tucci, head of government bond trading at RBC Capital Markets in New York, said some of the demand for two-year T-notes reflected the usual end-of-quarter moves by banks and other investors to bolster their balance sheets with liquid securities.
But he said more investors also were taking the view that “without fiscal stimulus the economy has no momentum.” That boosted the appeal of Treasuries as a refuge, even at nominally low interest rates.
What’s more, Federal Reserve policymakers, who will wrap up a two-day meeting Wednesday, are expected to repeat their pledge to keep their benchmark short-term rate near zero for an “extended period.”
The Treasury market will face a bigger test of investor demand Wednesday and Thursday, when the U.S. will sell $38 billion in five-year notes and $30 billion in seven-year notes, respectively.
