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Treasury note prices were down across the curve today and the 2-year Treasury note remained within striking distance of a two month high in yield after the Treasury Department sold a record $30.0 billion of the 2-year Treasury notes in today’s auction. The 2-year Treasury note is showing remarkable resilience even as prospects for future Fed target interest rate cuts seem to be riding off into the sunset.
The $30.0 billion of 2-year Treasury notes were auctioned to yield 2.225 percent, which was less than the pre-auction estimated yield of 2.2336 percent by several broker/dealers. The indirect bidders, the group that includes the foreign central bankers, bought 33.6 percent of the auctioned amount. This marked the largest participation by the indirect bidders in seven months. Over the previous six auctions the indirect bidder participation percentage has averaged 23.0 percent.
The bid to cover ratio on the auction was $2.21 to $1.00, meaning that for every $1.00 of securities available for purchase there were $2.21 in bids to cover. The bid to cover ratio has averaged $2.37 to $1.00 for the last six auctions. The bid to cover ratio is an indication of the level of demand for the auctioned security. Since the ratio declined for this auction it would indicate that interest in the 2-year Treasury debt is waning. Without the indirect bidders’ participation in this auction, the results would have been mediocre at best.
The yield on the 2-year Treasury note is not 4.0 basis points lower than the target interest rate of 2.25 percent. This is the narrowest margin between the two rates since July of 2006 following the Fed’s 17 consecutive target interest rate increases that ended in June 2006. Over the past twenty years, the 2-year Treasury note has yielded, on average, approximately 40.0 basis points higher than the Fed’s target interest rate.
Utilizing Bloomberg’s Federal funds implied probability model, interest rate futures traders on the Chicago Board of Trade indicate an 80.0 percent chance the Fed will reduce its target interest rate by 25 basis points to 2.00 percent at the next FOMC meeting on April 30th. Yesterday the odds were at 82.0 percent. A week ago the odds were 76.0 percent. The same probability model indicates a 19.2 percent chance of an additional 25 basis point target interest rate cut to 1.75 percent at the June 25th FOMC meeting. The probability was at 14.8 percent yesterday. One week ago the probability was at 41.7 percent.
The yield on the 2-year Treasury note rose 1.7 basis points to 2.210 percent at the close of the session. The yield on the 10-year benchmark Treasury note rose 5.4 basis points to 3.747 percent at the close. The yield differential between the 2-year Treasury note and the 10-year benchmark Treasury note widened by 3.7 basis points to 153.7 basis points. This compares to a yield differential of 150.0 basis points yesterday.
The Treasury Department plans to auction a total of $57 billion in debt this week. Yesterday the Treasury auctioned $8.0 billion in 5-year Treasury Inflation Protection Securities and plans to auction $19.0 billion of regular 5-year Treasury notes tomorrow, the largest offering for this maturity debt since 2003.
Ambac Financial Group Inc., the monoline bond insurer that has lost approximately 93.0 percent of its stock market value over the past year, reported a larger than expected first quarter loss that sent the stock plummeting 43.0 percent in the second largest one day percentage drop in price since the stock started its free fall last year. Ambac announced that it plans to seek shareholder approval to increase its authorized shares to 650 million up from the current 350 million authorized share limit. Ambac executives disclosed the company is in violation of loan covenants due to impairments and write downs that have pushed the company’s net wroth below acceptable bank requirements. This covenant violation could prevent access to a $400.0 million bank credit facility. Ambac executives are in discussions with bankers to amend the loan covenant.
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