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. Released on 05/24/2006 Yield Awarded 4.933 % Highlights In good news for the bond market, demand was strong for the monthly 2-year note auction despite the risk that the Federal Reserve will raise its overnight rate at the June FOMC. The Treasury sold $22 billion of the notes at a high yield of 4.933 percent, about 1 basis point below the when-issued note at the 1:00 p.m. ET bidding deadline and about 2 basis points below midday expectations. The bid-to-cover was very strong at 2.58 vs. 2.05 in the April auction. Bidding from non-dealers was solid as the group made up 31 percent of accepted competitive bids, up from 26 percent in April. The bond market firmed in immediate reaction to the results. Dealers have been reporting risk-aversion demand for Treasuries, triggered in part by the recent drop-off in the stock market. Today's results will raise expectations for strong demand at tomorrow's smaller $14 billion 5-year note auction, a maturity a bit less sensitive to a hike in the Fed's overnight rate. 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 Consensus Data Source: Market News International Legal Notices | © 1998-2006 Econoday, Inc. All Rights Reserved.