Note: The concepts and data analysis outlined in this post are strictly those of Lee Adler, with charts derived from that publication assistance from AI. I have reviewed and edited AI output to correct its errors and hallucinations.
Bloomberg’s headline called Tuesday’s 2-year Treasury note auction “solid.”
“The US Treasury saw modestly stronger demand for a $69 billion auction of two-year notes Tuesday…”
— Bloomberg, May 27
Let’s not take their word for it.
🧠 The Real Story
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The yield rose from last month’s 2-year auction. That’s weakness. Period.
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Bid/cover increased — because indirect bids rose and dealer padding increased
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Non-dealer demand rose, but that was largely mechanical—driven by T-bill paydowns.
So what looks like “stronger demand” is just the optical illusion of bid/cover—a metric gamed every month by Primary Dealers who pad the books with throwaway bids.
📉 The Dealer Bluff Is Fading
The chart below tells you everything you need to know.
🟥 Dealer Bid/Takedown Ratio: engineered to manage optics
🔵 Non-Dealer Bid/Takedown Ratio: real, stable, repeating
On May 27, dealer bid/takedowns rose, while non-dealer bid/takedown rose slightly. That explains the “strong” bid/cover ratio—stable non dealer demand and an increase in excess dealer demand. Their bids were 13 times what they actually bought. That’s a lot of excess bidding away from the real market, designed simply to manipulate total bid/cover.
📊 Non-Dealer Tendered vs. Dealer Tendered
This week’s auction saw a jump in non-dealer tenders—coinciding with a $33 billion T-bill paydown in the weekly bill auctions. That cash had to go somewhere, and without bills to roll into, the 2-year became a parking spot.
Chart 2: Non-Dealer vs. Dealer Tendered Totals
Note how total dealer bids ease exactly when non-dealer money floods in, and vice versa.
It’s not “demand”—it’s THE DEALERS MANIPULATING THEIR BIDS to keep the total bid/cover within the historically “normal range.”
🔍 Bid/Cover = Meaningless Mirage
The headline bid/cover was 2.57, up from 2.52 in April. But the bid/cover is still in a weakening trend tracking the trend of non-dealer demand.
But again: That number is manufactured and yield rose. The real bid was weaker, otherwise yield would not have risen.
🔍 What About Foreign Demand?
Bloomberg often equates indirect bids with foreign central banks (FCBs). But that’s outdated—and misleading.
Today, indirect bidders also include domestic asset managers, smaller banks, and—most significantly—hedge funds running carry trades. The earlier uptrend and recent upticks in indirect bidding are not signs of resurgent foreign demand for duration. More likely, they reflect tactical positioning by institutions rolling maturing one-year bills into 2s, using laddering strategies to manage cash flows.
That’s not long-term conviction. It’s opportunistic cash management.
Even if FCBs still comprise a meaningful share of the indirect bid, their influence is waning. The upward trend in prior quarters was driven primarily by non-FCB indirects. This year, the overall indirect trend has weakened.
Meanwhile, the indirect takedown ratio—the share of awarded notes versus tendered bids—has been falling persistently. That signals these bids are increasingly away from the market. In other words, they’re only participating at higher yields, while real demand is coming from more yield-insensitive direct bidders.
On another metric, the portion of the bid the Indirects are winning has been falling persistently.
🔍Primary Dealers Inflate The Optics
Meanwhile, Primary Dealers throw up garbage bids to inflate the overall bid/cover.
Primary Dealer Bid/Takedown Ratio
At prior auctions this year, dealers tendered 15-20× what they expected to win to push the bid cover ratio into their desired range. But with stronger non dealer bidding, they can cut back and still show a good bid/cover. So this time? They bid just 13 times their takedown. It’s still a garbage time bid, but just not as much garbage.
Less padding = tighter book = higher bid/cover. But the yield still rose, because real buyers weren’t fooled.
Final Take: Meh, Not Strong, Just Ingenious Optics
If you strip away the Primary Dealer bid/cover Kabuki Theater, this was a mediocre auction. No signs of distress, but no legitimate bump in conviction either.
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Yield rose = weaker pricing
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Dealer stuffing faded = but still 13 times their expected take down to pad bid/cover
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Indirect bids rose = displaced cash, not strong conviction, still firmly downtrending
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Direct bidders declined = quiet institutional Investors
There’s no smoking gun. Just a quiet unwinding of the usual deception.
“Solid” is a stretch. But the dealers can still manage the optics as needed.
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