The Treasury on Tuesday successfully auctioned $15.75 billion of two-year notes at an average yield of 4.17%.

The yield was up sharply from the previous auction, on April 27, when two-year notes were sold at an average yield of 3.88%.

The higher yield attracted a rush of investors to the issue. Bids exceeded accepted offers by a margin of 3.4 to 1, versus a 2.6-to-1 margin at the April sale.

"I did not expect this solid an auction," said Douglas Schindewolf, economist at Smith Barney, Harris Upham & Co.

A Dark Cloud

A note of uncertainty was added to the sale by a report in The Wall Street Journal on Monday that said the Federal Reserve had decided to shift policy toward tightening credit conditions.

But Astrid Adolfson, economist at MCM MoneyWatch, said economic data released on Tuesday convinced investors that even if the Fed had changed the policy tilt, a tightening was not imminent.

The Conference Board reported that its consumer confidence index fell to 61.5 this month from 67.6 in April. This was the lowest reading since October.

$11 Billion of Notes

"No one believes you can have a weak housing market and a decline in consumer confidence and then have a tightening," Ms. Adolfson said.

The Treasury today is scheduled to auction $11 billion of five-year notes. In when-issued trading, the new note yielded 5.38% at 3 p.m.

The yield on the 30-year bond was 7.01% at 3 p.m.

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