US 2-yr debt sale meets underwhelming demand

NEW YORK Dec 28 (Reuters) - The U.S. government sold $44 billion in two-year debt on Monday in an auction that attracted tepid demand amid a year-end slowdown that may bode ill for the rest of this week's bond sales.

Yields at the auction were above expectations, based on trade in the when-issued market just before the sale, suggesting investors were willing to bid aggressively to lower prices and raise yields.

Foreign and large institutional investors showed particularly poor appetite for the debt on offer, based on the indirect bidding category, which accounted for 34.5 percent of the sale.

That was well below the average of 47.54 percent in the two-year auctions since June, which has become a benchmark for comparisons since changes to the method of calculation boosted results for this category.

Some analysts were willing to forgive the low demand, however, given that the auction comes at the height of the traditional year-end slowdown in investing.

"In sum, a decent auction -- especially relative to fears that year-end would make this $44 billion in supply a tough chunk to swallow," said William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Stamford, Connecticut.

Indeed, despite the auctions' shortcomings overall demand was decent based on the bid-to-cover ratio of 2.91, above the average of 2.87 in the 12 previous sales of two-year debt over the last year.

The U.S. Treasury is offering a total of $118 billion in coupon securities this week, with a $42 billion auction of five-year notes scheduled for Tuesday.

Financial markets have watched bond auctions closely this year amid a burgeoning U.S. budget deficit, which was brought on by a costly financial sector bailout and efforts to stimulate the economy.

Investors briefly appeared to question the longevity of the United States' prized AAA credit rating back in May.

(Reporting by Burton Frierson; Editing by Andrew Hay)