TREASURIES-Bloated US debt burden drives bond rout

* Selling takes on momentum of its own

* Yield curve at steepest ever

* Mortgage investors exacerbate downturn (Adds comments)

By Pedro Nicolaci da Costa

NEW YORK, May 27 (Reuters) - U.S. government bonds came under heavy pressure again on Wednesday as investors worried about the ever-expanding amount of debt needed to fund a record $1.75 trillion budget deficit.

The downdraft in bonds was so heavy it actually dragged down the U.S. stock market, inverting the more normal relationship where U.S. Treasuries tend to track equities.

Selling by mortgage investors, who are often forced to sell U.S. Treasuries to hedge their positions, when yields surpass key levels, added renewed impetus to the downturn.

The decline was largely concentrated in longer-dated maturities, driving the gap between short- and long-term rates, known as the yield curve, to its steepest level on record.

"You're exploding the issuance at a time when demand for the product you've got is a best flat," said Malcolm Polley, president and chief investment officer at Stewart Capital Advisors. "So rates are going to go up. It's simple economics."

Benchmark 10-year notes US10YT=RR were down over 1-16/32 and yielding 3.74 percent, up nearly 20 basis points in just one day and over 1.25 percentage points in just six weeks. The spread between 10- and two-year notes widened to 275 basis points, the largest ever gap.

The market has become increasingly bearish since mid-March, when the Federal Reserve first announced its intention to buy up to $300 billion of U.S. Treasuries over six months.

The rise in yields in recent weeks was at first due to signs of economic stabilization and less need for a safe-haven, but recently the trend has shifted toward skittishness over the huge U.S. government borrowing requirement this year.

The Fed bought $6 billion in Treasuries on Wednesday alone, but that was not nearly enough to stem the tide.

Mortgage servicers often sell Treasuries to hedge against the unwanted lengthening of their portfolio's duration as yields head higher and curtail home loan refinancing activity.

NOT ENOUGH

Wednesday's auction of $35 billion in new five-year Treasury notes actually found good demand, particularly from indirect bidders, who took 44 percent of the deal. That category is often used as a loose proxy for foreign central bank interest in Treasuries, so traders welcomed their showing.