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Debt Bomb Rocks Wall Street

By Noel SheppardAssociate Editor, Newsbusters.org

Wall Street got rocked Wednesday by a "debt bomb" economists have worried about for decades.

Hours after the United Kingdom failed to attract enough buyers for its auction of $2.5 billion of 40-year bonds, the United States Treasury had similar difficulties with its sale of $34 billion worth of five-year notes and was forced to raise their interest rate to a much higher yield than had been anticipated.

Such problematic debt offerings came on the heels of Germany having two failed auctions of its bonds already this year.

As Briefing.com reportedshortly after our auction ended:

Treasuries were battered on the poor showing on the 5 year auction. The 5-yr was swung off to add over 8 basis points to its yield, while the 7-yr, which has its offering tomorrow, saw a beat down of over 9bps. The market has enough concerns about global supply and this ugly offering of the "relatively" safe, mid-duration notes adds to that jaundiced view.
As a result of this poor showing, stocks, which had been up over 200 points earlier in the day, quickly plummeted to down over 100 (courtesy BigCharts.com):

At the close, the Dow Jones Industrial Average surprisingly managed to close up 90 points in what many are describing as a very strange and volatile day.

However, with the Treasury set to sell $24 billion worth of seven-year notes tomorrow, traders have to be worried about how this will go.

More importantly, so should Americans as such debt offerings will be commonplace as our nation racks up trillion dollar deficits for the foreseeable future. As Bloomberg reportedTuesday:

President Barack Obama's government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.

Wow. $2.5 trillion in one year.

And, given the Congressional Budget Office's forecastof over $9 trillion in deficits in the next ten years, our Treasury will likely be auctioning off at least $1 trillion worth of paper a year for quite some time unless radical changes are made to President Obama's 2010 budget proposal.

This means the decades-old fear of America holding a bond or note auction without enough buyers showing up could be just around the corner.

Will there come a point when we'll have the same difficulty selling our debt as the U.K. had today and Germany has had twice this year? What happens then?

Sadly, these don't seem to concern the Obama administration and a Democratic-controlled Congress as they continue to spend money almost faster than it can be printed.

This raises an important question that should be on the mind of every citizen: if it was wrong for Americans to borrow money earlier this decade to purchase a house they couldn't afford, why are our elected officials seemingly making the very same mistake?

Noel Sheppard is associate editor of the Media Research Center's NewsBusters.org. He welcomes feedback at nsheppard@newsbusters.org.

Noel Sheppard is associate editor of the Media Research Center’s NewsBusters.org. He welcomes feedback at NewsBustersNoel@gmail.com.