| NEW YORK
NEW YORK U.S. Treasury debt auctions have become so frequent and so large as the budget deficit heads toward a record $1.75 trillion that their impact is beginning to extend beyond the bond market.
A record $34 billion five-year note auction on Wednesday was met with what traders described as subpar demand, with the government forced to offer a higher yield to attract buyers. Following the auction, bonds added to their early losses, slipping to session lows.
In an unusual twist, however, the depressive effect was felt in stocks as well. The move was all the more curious because equity markets tend, almost instinctively, to move in the opposite direction to government debt.
"Everything is becoming more interrelated and we have more concern about government intervention and all of the debt they are going to have sell," said Lou Brien, market strategist at DRW Trading Group in Chicago. "If there is trouble with that then there could certainly be trouble with getting the economy going again."
To date, most government bond auctions have been surprisingly well-received given the sheer magnitude and rapidity of new issuance.
Support has also come from the Federal Reserve, which after its latest policy meeting committed to buying $300 billion in Treasury notes and bonds in an effort to keep long-term rates -- and hopefully mortgage rates -- at low levels.
Indeed, some traders warned the auction was merely an excuse for equity investors to cash in on a rally. Still, the very fact that the bond sale was mentioned as a reason for the sell-off in stocks was worthy of note.
The market impact was certainly visible. Stocks pared gains and turned lower. Bonds fell further. The S&P 500 fell about 1 percent before a late-day turnaround, while the 10-year Treasury note was off 21/32 and yielding 2.78 percent.
Part of the negative sentiment came from concerns that key Asian economies like China and Japan, the biggest holders of U.S. Treasuries, might one day tire of holding U.S. bonds.
Such fears have been voiced often in recent years but have, thus far, proven premature. However, some rumblings from the Chinese government have recently given more credence to the possibility that China is becoming reticent about its status as America's creditor.
Premier Wen Jiabao said recently that he was worried about the "security of our assets." This week, a top Chinese central banker rattled financial markets with a proposal to shift the global currency regime away from the dollar and toward SDR's, a basket of currencies used by the International Monetary Fund.
Such proposals were met with the skepticism that one might expect from U.S. officials, but the very fact that such discussions were taking place in the public domain hinted at the renewed seriousness of the concerns.
Adding to the nervousness, Britain experienced its first "failed" debt auction since 2002, meaning there were not enough bids for the amount of debt on offer.
"Is this the shot across the bow to weaker auctions and higher rates?" asked George Goncalves, a chief Treasury market strategist at Morgan Stanley in New York. "We think it's too early to draw that conclusion as there were many cross-currents at work today in the bond market, but it does highlight how focused the broader market is on Treasury debt issuance."
(Editing by Leslie Adler)