Investors lent money to the government at a record low rate for two-year debt Tuesday.

The Treasury Department sold $35 billion in two-year notes at 0.40 percent, the lowest yield ever for an auction of two-year notes. Foreign banks and investors placed bids for 3.43 times the amount offered, above the 12-month average and another sign of strong demand for Treasuries.

"Despite incredibly low yields, impending Fed intervention and the steadily increasing prospect of inflation, bond investors were perfectly happy to lend the government money for two years," said Dan Greenhaus, chief economic strategist at Miller Tabak, in an e-mail to clients. He tied the steady appetite for bonds to the "fallout from the Great Recession": investors will now accept small returns to feel safe.

Last month, the Treasury auctioned the notes at 0.44 percent, the previous record low rate.

Treasury yields have sunk to historic lows as traders expect the Federal Reserve will launch a new round of bond-buying after its meeting Nov. 3. Rates on two-year notes are also weighed down because they stick close to the Fed's benchmark short-term rate, currently 0.19 percent.

The auction of two-year notes came a day after the Treasury sold inflation-protected bonds known as TIPS at a negative yield, a first since the government introduced the bonds in 1997. TIPS buyers are betting the Fed's action will stoke inflation, turning the bonds' negative yields into positive gains.

Altogether, the Treasury expects to raise $109 billion across four bond auctions this week. The next comes Wednesday with the sale of $35 billion in five-year notes.

Treasuries dropped Tuesday, nudging yields up. The 10-year note dipped 65.6 cents to $99.81, and its yield rose from 2.56 percent to 2.64 percent. The 30-year bond lost $1.50 to $97.84, pushing the yield from 3.91 percent to 3.99 percent.

The yield on the two-year note ended the trading day at 0.40 percent.
In the Treasury bill market, the three-month T-bill paid a 0.12 percent yield at a discount of 0.13 percent.