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Treasury Yields Ease After 2-Year Auction Sees Impressive Foreign Demand

Foreign buyers took down 60.5% of the Treasury's $60 billion 2-year note auction, the highest in more than a decade.

U.S. Treasury bond yields moved lower Tuesday following a better-than-expected auction of 2-year notes that saw the largest demand from foreign investors in more than a decade. 

The Treasury sold $60 billion in 2-year notes at an auction-high yield of 0.242%, up 2 basis points from the the previous auction in late July and just at the outer-edge of the Fed Funds target rate of between 0% and 0.25%. 

The extra yield appeared to attract an increase in domestic demand, as well, with the so-called bid-to-cover ratio coming in at 2.65, up from the 2.47 recorded last month. Indirect bidders, comprised mostly of foreign central bank buyers, took 60.54% of the auction, the highest percentage since 2009 as investors hunt for returns in a market comprised of $16 trillion worth of fixed income assets trading with a negative yield.

Benchmark 2-year note yields traded at 0.224% in the immediate moments after the auction, while 10-year notes were modestly lower at 1.283%.

The sale marks the final benchmark auction ahead of a Friday speech from Federal Reserve Chairman Jerome Powell that could trigger changes to the central bank's near-term policy track, including the pace of its $120 billion in monthly bond purchases, as the economy continues to recover.

Recent data -- in concert with a surge in Delta-variant infections and a plateauing in coronavirus vaccination rates -- has indicated a modest slowdown in the second half recovery, with a surprise decline in June retail sales, cooling manufacturing activity and a pullback in the housing market.

Minutes of the last Fed meeting, published on August 18, indicated the central bank is looking to begin tapering its bond purchases before the end of the year, but showed that a majority of participants in the meeting noted that the current increase in Delta variant infections could restrain growth in the labor market and delay the full re-opening of the world's biggest economy.