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Record Foreign Demand for U.S. Treasuries Signals Confidence Amid Rate Speculation

In a striking display of international appetite for U.S. government debt, today’s Treasury auction of $69 billion in two-year notes saw unprecedented foreign participation amid ongoing speculation about the Federal Reserve’s next policy move.

The auction settled at a yield of 4.169%, marking a decline from January’s rate of 4.211%. Notably, the final yield came in 1.1 basis points below the When Issued level of 4.18%, representing one of the three largest “stop-through” rates observed in the past 24 months.

While the overall bid-to-cover ratio – a key measure of demand – showed some softness at 2.56, down from January’s 2.66 and falling below the six-auction average, the composition of buyers told a more compelling story. Foreign investors, represented through indirect bidders, claimed an all-time high of 85.5% of the total allocation.

This extraordinary level of international participation left domestic dealers with a historically low 6.9% share of the auction, while direct bidders secured 7.6%. The remarkable foreign demand comes at a time when market participants are increasingly questioning whether the Federal Reserve’s next move will be a rate increase rather than the widely anticipated cut.

The strong auction results had an immediate impact on the broader Treasury market, with the benchmark 10-year yield dropping to new daily lows below 4.40%, suggesting potential for further decline. This market response indicates that despite uncertainty surrounding the Fed’s future policy decisions, there remains robust demand for U.S. government securities, particularly from international investors.

The auction’s success appears to challenge current market narratives about interest rate trajectories and suggests continued confidence in U.S. Treasury debt as a key investment vehicle for global capital. The record-setting indirect bid percentage is particularly noteworthy as it demonstrates that foreign investors remain committed to U.S. government securities despite ongoing debates about monetary policy direction.

This development comes at a crucial time for Treasury markets, as participants attempt to reconcile mixed economic signals with potential shifts in Federal Reserve policy. The strong foreign demand could indicate that international investors are taking a longer-term view, looking past immediate policy uncertainties to focus on the fundamental strength and stability of U.S. government debt markets.

The auction’s results also highlight the continuing role of U.S. Treasuries as a global safe-haven asset, even in an environment of policy uncertainty. The significant stop-through suggests that buyers were willing to pay a premium to secure these securities, reflecting strong underlying demand for U.S. government debt instruments.

For market observers, this auction serves as a reminder that despite domestic debate about Federal Reserve policy and interest rate trajectories, international investors maintain a robust appetite for U.S. government securities. The historically low dealer takedown further emphasizes the strength of end-user demand, as primary dealers were left with minimal inventory to absorb.

Looking ahead, this strong showing of foreign demand could have implications for future Treasury auctions and might influence market expectations about the sustainability of current yield levels. The auction’s success suggests that despite various market concerns, the U.S. government continues to find ready buyers for its debt, particularly among international investors who appear undeterred by ongoing policy discussions and rate speculation.