Expectations for a Fed rate cut are at an all-time high! Record demand for the sale of 2-year US Treasury bonds

According to the Zhitong Finance and Economics APP, investors have flocked to the monthly two-year Treasury bond auction by the U.S. Department of the Treasury, which strongly demonstrates investors' confidence in the Federal Reserve's interest rate cuts starting this year.

Data shows that in this auction, the total allocation ratio for the two categories of bidders, including investors, reached 91%, the highest since 2003. The allocation ratio for the third category, primary dealers, was only 9%, hitting a historical low.

The auction size this time was $69 billion, setting a record, with a bid yield of 4.434%, more than 2 basis points lower than the pre-issuance trading level at 1 p.m. Eastern Time. This is the lowest bid yield for a two-year Treasury bond issuance since January, when the sale size was $60 billion.

John Canavan, an analyst at the Oxford Economics Research Institute, stated that the prospect of the Fed laying the groundwork for a rate cut in September "sustained strong short-term demand for U.S. Treasuries this month, which continued into this afternoon's auction."

The yield on the two-year Treasury bond peaked above 5% at the end of April and has steadily declined since then, as futures prices reflect bets that the Fed will cut rates by at least 25 basis points twice before the end of 2024, starting in September. When policymakers met at the end of July for the eighth consecutive time without changing rates, it marked a year since the Fed raised the floating rate range to the current 5.25%-5.5%.

Based on records compiled since 2019, the largest difference between expected yield and actual yield highlights the demand for two-year Treasury bonds. As the Fed is about to cut rates, the nearly record-high $6.154 trillion money market funds since 2019 are also a factor behind the strong sales of two-year Treasury bonds.

Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, wrote in a report, "There is still a lot of cash on the sidelines in the money market and Treasury market, consistent with the view that investors are now starting to enter the coupon curve to lock in future two-year returns. Intuitively, as the certainty of the recent rate cut prospects increases, primary market supply will be welcomed."

In late trading, after the first auction of the week, short-term Treasury yields approached daily lows. The U.S. Treasury will continue its bond sales this week, issuing $70 billion in five-year Treasury notes on Wednesday and $44 billion in seven-year Treasury notes on Thursday The market is still waiting for key data to be released later this week, including the US economic growth report and the latest data on inflation indicators favored by the Federal Reserve.

Canavan from the Oxford Economics Research Institute said, "There is usually a strong correlation between the intensity of indirect bidding and the demand from domestic investment funds. It seems that investment funds may have been seeking to enter the market before the expected rate cut this year."

He added that the situation will become clearer when the auction quota numbers are received on August 7th