The US Treasury has completed an auction for $69 billion worth of 2-year notes, achieving a high yield of 3.641%. At the time of the auction, the WI level was 3.656%, with a tail of -1.5 basis points compared to a 6-month average of -0.4 basis points.
The bid to cover ratio was 2.69 times, surpassing the 6-month average of 2.59 times. Direct bids constituted 33.16% of the auction, up from the previous 6-month average of 23.0%. Indirect bids accounted for 68.95%, also higher than the average of 66.1%.
Dealer bids made up 9.74% of the total, below the 6-month average of 10.9%. The auction received a grade of A, reflecting strong demand for these notes.
Strong Market Conviction
The strong demand for 2-year notes, evidenced by the significant -1.5 basis point tail, signals a powerful market conviction. Bidders were so aggressive they accepted a much lower yield than what was trading just moments before the auction. We see this as a clear sign that investors are positioning for lower interest rates in the near future.
This sentiment is reinforced by recent economic data showing a clear cooling trend. The July 2025 CPI report, for instance, indicated core inflation fell to 2.8%, bringing it much closer to the Federal Reserve’s target range. This, combined with last month’s weaker-than-expected jobs report of only 95,000 new payrolls, gives the Fed room to consider cutting rates later this year.
Investment Strategies for Traders
For derivative traders, this suggests positioning for falling short-term yields should be a primary focus. We believe going long futures contracts tied to the SOFR rate, such as those expiring in late 2025 or early 2026, is a direct way to express this view. These positions will profit if the Federal Reserve cuts rates, or if the market continues to price in a high probability of such cuts.
Another strategy to consider involves the yield curve. With such strong demand anchoring the front end, there is a good chance the yield curve will steepen if long-term inflation fears remain even slightly elevated. This “bull steepener” can be played by buying 2-year Treasury note futures while simultaneously selling 10-year note futures.
Looking back, this market behavior is a significant departure from the rate-hiking anxiety that dominated trading through 2023 and much of 2024. The overwhelming demand at this auction suggests bond market volatility may decline as the Fed’s path becomes more predictable. Therefore, options strategies that benefit from falling volatility, such as selling straddles on Treasury futures or buying puts on the MOVE Index, could prove effective.
