2yr US treasury notes

cnayak · December 18th, 2007, 4:21 am

Why is the coupon rate of the 2-yr US Treasury note so low. Obviously, there is a lot of demand for it, but why exactly the 2-yr note? http://www.bloomberg.com/markets/rates/index.html

daveangel · December 18th, 2007, 8:00 am

two factors are driving the yields on 2year notes. First is a flight to quality as the level of trust in highly rated debt is very low following the debacle in credit markets. Second is an expectation that rates will have to come down substantially and quickly in the US. The whole yield curve has come down - at one point yield on the 10-year note was around 3.80% - but has steepened at the same time.

cnayak · December 19th, 2007, 11:39 am

But why is the yield on two year note so low? I mean whats so great about the two-year investment period

daveangel · December 19th, 2007, 12:29 pm

its a good place to park your cash without taking a great deal of duration risk

cnayak · December 19th, 2007, 12:43 pm

So, a majority of the paticipants think that the current crisis will dissipate within two years?

daveangel · December 19th, 2007, 12:52 pm

I wouldnt say that given that 5 and 10-year notes had also rallied. I think in general the TED spread diminishes the further out you go but to be honest I dont think this is a good indication of expected time for the crisis to abate. Prior to the crisis, the TED spread was tiny !

Martinghoul · December 27th, 2007, 2:07 pm

As daveangel mentioned this is all about flight-to-quality, primarily...As to why the two-year note, there are many reasons, including the shape of the curve driven by the expectations of the Fed; the activity of the money-mkt funds in both cash and repo mkts; the term structure of the FF/Libor spread, etc. etc. It's too long and boring to enumerate.