* 2-yr auction results overcome U.S. debt default jitters
* Foreign demand still weak at U.S. 2-yr auction
* Investment funds again show strong buying interest
(Adds background, context, details)
By Burton Frierson and Richard Leong
NEW YORK, July 26 The U.S. Treasury sold $35
billion worth of two-year notes on Tuesday in an auction that
managed to overcome worries over the government's Aug. 2
deadline to raise the debt limit.
The results appeared solid considering the uncertainty
clouding the bond market as Washington's showdown over raising
the debt limit grows more contentious, though foreign demand
remained at a low ebb.
It also suggests that some investors, at least, see nowhere
to run even if the United States were to default or if
political paralysis results in a downgrade of U.S. debt by
credit ratings agencies. [ID:nN1E76P12Q]
"Somehow it seems like Treasuries have become insurance
against their own downgrade. At least that's how it appears
from the market behavior," said Thomas Simons, money market
economist at Jefferies & Co in New York.
"This auction went pretty well. There was nothing
particularly interesting about the statistics, but in the
context of the current debt ceiling issues, the bid was
The bond market showed little reaction to the auction and
maintained the day's earlier gains. The benchmark 10-year note
US10YT=RR was last trading 14/32 higher in price on the day,
yielding 2.95 percent.
The sale, the first of this week's three note offerings
totaling $99 billion, attracted bids worth 3.14 times the
amount on offer. That was up from last month's auction, which
was poorly received, but below the six-month average of 3.21.
The next sales are a $35 billion auction of five-year notes
on Wednesday and Thursday's $29 billion offering of seven-year
In one sign of strength, yields at Tuesday's auction came
in below expectations, based on trading in the when-issued
market at the 1 p.m. deadline for bids, which indicates
investors were not demanding an above-market premium.
However, a measure of foreign demand, indirect bids, came
in below average, suggesting foreign investors might be taking
a skeptical view of the market given the contentious debate
over the U.S. national debt.
President Barack Obama's Democrats and their Republican
rivals headed for a showdown over competing debt plans one week
before a deadline for averting a potentially disastrous U.S.
Indirect bids accounted for about 28 percent of the sale,
which is below their six-month average of 30 percent.
One key support was the direct bidder category, which
includes investment funds. This group showed strong interest,
helping the auction overall look reasonably solid.
"Given the veil of uncertainty that hangs over the Treasury
market, we see this auction as a very good result," said
William O'Donnell, head of Treasury strategy at RBS Securities
in Stamford, Connecticut.
"Indirect bidder participation was below average again but
direct bidder participation was strong and allowed this auction
to come pretty much on the screws."
Direct bidders took 20 percent of the offering, well-above
their six-auction average of 13.5 percent.
(Additional reporting by Ellen Freilich; Editing by Neil