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US 2-Year Bond Auction Sees Solid Demand, But Foreign Buyers Decline

A modestly higher yield in the Treasury's 2-year bond auction failed to attract more foreign buyers, although overall demand remained solid amid a hefty week of sales.

The U.S. Treasury attracted solid demand for its latest benchmark bond auction, selling $60 billion in 2-year notes at a yield of 0.152%.

The sale drew a bid-to-cover ratio, a key gauge of investor demand, of 2.54, meaning the Treasury received interest for more than two-and-a-half times the amount offered for sale, up from 2.44 in February when the bonds were sold at a record low yield of 0.98%.

Foreign demand, however, appeared to wane, even with the modestly higher yields and the U.S. dollar index trading at a two-week high of 92.243 against a basket of its global peers. Indirect bidders, which typically represent international buyers, took up 50.7% of the total auction, compared to 57.3% during the February sale.

Benchmark 10-year notes were little-changed at 1.649% following the 2-year auction, while 2-year notes moved lower, to 0.151%.

Last week, benchmark 10-year Treasury bond yields hit a January 2020 high of 1.75% amid renewed concerns for faster near-term inflation in the wake of the Federal Reserve's March policy meeting that pledge to keep rates at record lows for at least the next two years -- even as the economy looks set to grow at its fastest pace since 1984 -- and ended a capital break for domestic banks that could lead to further Treasury bond sales, and thus higher yields, in the months ahead.

Normally, that would have investors exceedingly nervous heading into a hectic week of bond auctions, which $328 billion in notes and as inflation signals hot up and deficit hawks renew their criticisms of the Biden Administration's $1.9 trillion American Rescue Act.

That said, analysts at JPMorgan cautioned that the Fed's removal of the SLR benefit, just as primary dealers are likely needed to take-up a greater share of the $209 billion in coupon paper on sale this week, could lead to another leg higher in Treasury yields -- and corresponding pressures on U.S. stocks -- in the days ahead.

"While valuations are supportive of increased demand from foreign investors ... foreign demand alone is unlikely to stabilize Treasury yields," JPMorgan said. "Moreover, over the very near term, liquidity conditions lend upside risk to yields ahead of (this) week’s supply process."