The Treasury sold two-year notes at a lower-than-forecast yield as direct bidders, a group that includes pension funds and insurance companies, bought their biggest share of the auction since April.

The $34 billion offering yesterday drew a yield of 0.386 percent, compared with a forecast of 0.390 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 26.1 percent of the notes at the sale compared with an average of 23.8 percent at the previous 10 auctions. Treasury will sell $35 billion of five-year notes today and $29 billion of seven-year debt tomorrow as concern turmoil in Syria may lead to wider military action and the central bank maintains an almost-zero target for short-term interest rates.

“We are seeing a bid for safety as the backdrop from what’s going on overseas plays out amid weaker equity markets and a Fed that still has the front end of the curve well anchored,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the primary dealers that are required to bid at the auctions. “The uncertainty should bode well for the week’s auctions.”

The yield on the current two-year note fell one basis point, or 0.01 percentage point, to 0.356 at 5 p.m. in New York yesterday, according to Bloomberg Bond Trader prices. The benchmark 10-year note yielded 2.71x percent. The Standard & Poor’s 500 Index of stocks fell 1.6 percent.

Fed Target

Two-year note yields have been restrained by Fed Chairman Ben S. Bernanke assurance that the central bank will keep its overnight lending rate at zero to 0.25 percent into 2015.

Treasuries extended their longest winning streak in six weeks yesterday as the Obama administration is constructing the legal and political justification for a limited military strike on Syria that would demonstrate international censure against chemical weapons.

At yesterday’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.21, the most since April.

Indirect bidders purchased 19.3 percent of the notes, compared with 30.4 percent at the July sale and an average of 25.5 percent at the past 10 offerings.

Primary dealers bought 54.6 percent of the notes, compared with a 10-auction average of 50.7 percent.

Sector Interest

“Investors are still interested in the sector, considering the geopolitical risk out there, and the economy, which is still very fragile,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer. “The U.S. response to Syria and the continued developments will continue to drive the market for the time being, which is giving the Treasury market some strength.”

Two-year notes have gained 0.03 percent this year through Aug. 26, compared with a decline of 3.5 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.

This week’s sales will raise $38.1 billion of new cash, as maturing securities held by the public total $59.9 billion, according to the U.S. Treasury.

Editors: Paul Cox, Greg Storey