* Short-dated bills in short supply
* $28 billion four-week bill auction draws strong demand
NEW YORK, May 3 (Reuters) - The U.S. Treasury's 52-week bill sale produced the lowest yield on record for a one-year bill auction, evidence of the demand for short-dated bills.
The Treasury's $28 billion four-week bill auction also drew strong demand, with the 4.81 ratio of bids received over those accepted a significant improvement from last month.
"In spite of yields approaching zero, the market bid aggressively in (the four-week) auction," said Thomas Simons, money market economist at Jefferies & Co. in New York.
Simons said short-dated bills are in short supply. Since many investors cannot buy bills at negative yield levels, secondary trading has been light. As a result, these investors must "bid aggressively in auctions to take any positive yield they can find, scant as it may be," he said.
RECORD LOW YIELD IN ONE-YEAR BILL AUCTION
The Treasury said the 0.2 percent yield on the 364-day bill it sold on Tuesday was the lowest ever for a one-year bill. [nWAT015084]
"The long end of the bill curve has been slower to react to the new FDIC rules enacted in the beginning of April, but yields have declined steadily in recent weeks," Simons said.
The recent move by the Federal Deposit Insurance Corp. to charge banks insurance fees based on their total asset size roiled the short-term rates market last month, leaving funding markets short of collateral.
The aggressive bid for the one-year bill auction Tuesday, despite the record low yield, "is likely an indication that the bid will continue to hold firm," Simons said.
Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee, said the auction results were positive for the bond market.
"People do not expect a big increase in yields even after the debt ceiling situation is resolved," he said. "That's not going to change fundamentally any time soon."
In Europe, traders awaited the European Central Bank's meeting on Thursday, trying to figure out the future course of monetary policy.
Money markets were split over whether to price in an interest rate rise in June, after being close to doing so after the ECB's April meeting. Those bets are fading due to a strong euro and talk of a Greek debt restructuring.
Investors expect the ECB to leave interest rates unchanged at 1.25 percent this week. [nLDE7420ZV]
"The Fed is constantly dovish and ... we have weaker activity data in the UK and the risk that we may have seen the top in UK inflation rates," said Alessandro Tentori, rate strategist at BNP Paribas.
Euro overnight index swaps price in two more rate increases by the end of the year, with significant chances of a third. [ECBWATCH]
A Reuters poll showed 17 of 74 analysts expected an ECB rate rise in June, compared with 44 in July. [ECB/INT] (Additional reporting by Richard Leong in New York and Marius Zaharia in London; Editing by Leslie Adler)
* 52-week bill sale produces lowest yield on record
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