January 23, 2018 / 7:52 PM / a month ago

UPDATE 1-Investors load up on U.S. 2-year note supply

(Adds market reaction, analyst comments, graphic)

By Richard Leong

NEW YORK, Jan 23 (Reuters) - Investors scrambled to buy $26 billion of U.S. two-year government notes on Tuesday, signaling some support for the bond market which has wobbled on worries about rising domestic inflation and less stimulus among overseas central banks.

Expectations the Federal Reserve may raise key short-term borrowing costs at least twice in 2018 helped propel the two-year Treasury yield to a nine-year peak of 2.082 on Monday.

Some analysts, however, cautioned the rebound in demand at the latest two-year auction may not repeat for the five-year and seven-year debt sales later this week.

The U.S. Treasury Department sold the latest two-year Treasury issue to the strongest demand in more than two years, marking the highest yield at an auction since September 2008, Treasury data showed.

“The buyside gave this auction a whole lotta love!” Ward McCarthy, chief financial economist at Jefferies LLC, wrote in a research note, referring to indirect and direct bidders.

Indirect bidders which include fund managers and foreign central banks bought 58.7 percent of the latest two-year supply, the most since last July.

Small bond dealers, large institutional investors and other direct bidders purchased 15.89 percent, up slightly from 14.54 percent at last month’s two-year auction.

The ratio of bids to the amount of two-year notes offered was 3.22 percent, the highest level since September 2015. This measure of overall auction demand was 2.52 at the prior two-year note sale in December.

The latest two-year issue was priced at a yield of 2.066 percent, the highest since September 2008.

“Overall a solid result, though we’re not as optimistic that the 5-year will receive the same reception,” Aaron Kohli, interest rate strategist at BMO Capital markets, wrote in a note.

The Treasury will sell $34 billion of five-year notes on Wednesday and $28 billion seven-year notes on Thursday.

In the “when-issue” market at 2:10 p.m. EST (1910 GMT), traders expected the upcoming five-year and seven-year issues to sell at yields of 2.424 percent and 2.557 percent , respectively, according to Tradeweb.

Reporting by Richard Leong; Editing by Tom Brown and Matthew Lewis

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