The Treasury met strong demand for $16 billion in two-year notes on Tuesday.
The notes were offered at an average yield of 4.16%, which was 1 or 2 basis points below expectations, analysts said.
At the previous auction of two-year notes, on May 25, the average yield was 4.17%.
Bids exceeded accepted offers by a ratio of 2.77 to 1. This is slightly higher than the average 2.72-to-1 "bid to cover" ratio of the previous nine auctions of two-year notes.
Ratio Off Kilter in May
The May auction drew a ratio of 3.44 to 1, but that level was termed an aberration.
Banks have shown strong demand for two-year notes in the past few years as they hunt for short-term investments in light of weak loan demand.
That trend continued on Tuesday, analysts said.
"I expected strong bank demand, and the results proved that to be the case," said William Sullivan, money market economist at Dean Witter, Discover & Co.
The Treasury is scheduled to sell $11 billion in five-year notes today, and analysts are looking for another successful sale.
Douglas Schindewolf, money market economist at Smith Barney, Harris Upham & Co., said five-year notes are less vulnerable to a Federal Reserve tightening of credit.
He said new buyers are emerging for the five-year. These include municipalities, which buy five-year notes to back refinancing programs, known as defeasance plans.
Banks also are moving further out on the yield curve, buying more three- and five-year notes. In when-issued trading, the five-year note yielded 5.19% late Tuesday.
Long Bond Yield Unchanged
The Treasury's 30-year bond yielded 6.77%, unchanged from Monday.
Weakness in retailing issues hurt stocks. The Dow Jones industrial average lost 13.29 points to 3,497.53. The Standard & Poor's 500 index lost 0.29 point to 445.93. And the Nasdaq composite index lost 1.95 points to 686.79.
The dollar continued to benefit from political turmoil in Japan and finished at 110.86 yen, up from 110.60.