Stocks rose nearly 2% in the first hour of trading after better-than expected reports on new home sales and durable goods orders indicated the economy might be closing in on a bottom. But after a surprisingly weak auction of five-year Treasury notes, stocks began to fade and eventually declined 4.4% peak to trough before finding a bit of footing to finish with a gain on the day.
The indirect bid, demand from domestic and foreign institutions, including foreign central banks, for the $34 billion five-year Treasury note auction was 30%, compared to 48.9% from the previous auction in February and an average of 30.1% for the last 10 auctions.
The weak U.S. auction came after a sale of U.K. government debt Thursday failed, the first failed auction of conventional U.K. government bonds since 1995. Like the U.S., the U.K. is hoping to sell a large quantity of new debt as it looks to stimulate its economy, but there are now some signs that investors may be balking at purchasing the entire supply.
As the U.S. plans to run an estimated $1.5 trillion budget deficit in an effort to mitigate the financial crisis, it needs to issue debt to cover gap. Weak demand on the part of global investors will drive interest rates higher, complicating the government's efforts to get the economy expanding again.
If rates do rise, it will point to the inability to control long term interest rates and likely necessitate the need for the Fed to print additional reserve notes in order to monetize the debt. The Fed's balance sheet has already expanded to just over $2 trillion (from about $800 billion prior to the onset of the crisis) and with the new facilities recently announced, could double the amount of assets it holds to $4 trillion.
At Wednesday’s close of floor trading on the NYSE, the DOW was on 7749.81 with a gain of 89.84 points (1.17%) while the S&P finished on 813.88, up 7.76 points (0.96%). The technology-heavy NASDAQ closed on 1528.95 after rising 12.43 points (0.82%).
The dollar traded mixed but was mostly lower as stocks declined during the middle of the session. On the day, the greenback ended up with a decline of 0.87% to the euro, 0.06% against Australia's currency and 0.59% on the yen as it gained 0.94% on cable.
Treasuries were sold for a second day after the weak bond auction. Yield on the 2-year note rose 2.3 basis points to 0.954% while yield on the 10-year note gained 7.2 basis points to 2.778%.
Crude for April delivery was recently trading down $1.12 (-2.08%) to $52.84 per barrel.
Gold for April delivery was recently trading up $13.20 (1.43%) to $936.50 per ounce.