U.S. Treasuries rallied Wednesday as grim housing data and poor Merrill Lynch quarterly results painted a bleak picture of the economy and boosted expectations of a rate cut by the Federal Reserve next week.
U.S. stock losses ignited a safe-haven bid for U.S. government debt and sent the two-year Treasury note's yield to its lowest level since September 2005 before the sale of $20 billion of new two-year notes.
The auction had no impact on the market even as it generated below-average demand. The bid-to-cover ratio, an indication of demand, was 2.86, slightly below recent averages.
Indirect bidders, who include foreign central banks, took about 22 percent of the sale, below average.
"The average auction stop was a touch through the 1PM yield. ... Indirect bids were a little weak. The bid-to-cover ratio was below recent auctions. The market is not affected," said John Spinello, Treasury strategist at Jefferies and Company.
The two-year note -- which responds closely to expectations for central bank interest rate moves and to safe-haven flows out of stocks -- traded up 5/32 in price for a yield of 3.73 percent. The yield was the same before the auction and it compared with 3.81 percent late Tuesday.
Bond yields and prices move inversely.