Dealers take large share of US 2-year note sale

NEW YORK: The US Treasury Department sold $33 billion in two-year notes to fair demand on Tuesday, the first sale of $99 billion in coupon-bearing supply this week.

The sale came as two-year yields held just below almost 10-year highs reached on Thursday, as investors bet the Federal Reserve will raise rates at least two more times this year.

The two-year notes sold at a high yield of 2.59 percent, just below where they traded before the auction. Dealers took 45.37 percent of the sale, their largest share since Dec. 2016.

"It wasn't terrible, it wasn't super good, and the stats were really sluggish," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York.

The Treasury has been increasing the size of its auctions as it increases debt to pay for the rising deficit, which is being hurt by spending increases, and to make up for declining purchases by the Fed.

The two-year note auction size has increased from $26 billion in January.

Large dealers have had to absorb much of this increase as demand from other investors has failed to make up for the increase in supply.

"Those balance sheets are starting to feel very heavy," Kohli said.

Demand for this week's US debt sales is being watched for indications on whether last week's sell-off attracts buyers, or if investors are reticent to buy the debt with further weakness possible.

The government will sell $36 billion in five-year notes on Wednesday and $30 billion in seven-year notes on Thursday, in addition to $16 billion in two-year floating rate notes on Wednesday.

Wednesday's five-year note sale will come just before the Fed releases minutes from its May meeting, which will be further evaluated for indications of how many rate hikes are likely this year.

The US central bank left rates unchanged at the meeting and expressed confidence that a recent rise in inflation to near its target would be sustained, leaving it on track to raise borrowing costs in June.