The Treasury Department's $19 billion auction of 10-year notes attracted greater foreign interest, but the sale also drew a higher-than-expected yield and ultimately disappointed investors.

Wednesday's auction drew a high yield of 3.99%, compared to forecasts of 3.97%, and the bid-to-cover ratio for the 10-year notes was 2.62, lower than the five-auction average of 2.88, according to


While the indirect bidder take was fairly strong at 34.2%, which indicates high interest from foreign central banks, the higher-than-expected yield spooked the stock market. After the results were announced at 1 p.m. EDT, the 10-year note dropped 25/32 in price, pushing the yield higher to 3.96%, and the major U.S. indices slid to their worst levels of the session.


Dow Jones Industrial Average

was recently down 95 points, or 1.1%, at 8668, and the

Nasdaq Composite

was off 11 points, or 1.2%, at 931. The

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S&P 500

was lower by 27 points, or 1.4%, at 1834.

The 10-year note auction is the second of three this week. Tuesday's $35 billion sale of 3-year Treasury notes was considered a success, drawing a yield of 1.96% and a bid-to-cover ration of 2.82. Indirect bidders for 3-year notes, which includes foreign central banks, was 43.8%, better than it has been in previous months. On Thursday, the Treasury will hold an $11 billion, 30-year bond auction.

Robert Pavlik, chief market strategist with Banyan Partners, called the 10-year note auction the most important of the three as it acts as a benchmark. The 10-year note is closely tied to interest rates on mortgages and other consumer loans. The concern now, he says, is that rates will rise as the government's debt load ramps up.

"Mortgage rates are going to continue to go up unless the

Federal Reserve

decides to increase its purchases," Pavlik said. "But lower mortgage rates will only have a tame effect on the recovery efforts in the housing market."

Pavlik said that the high yield of 3.99% is likely why the bid-to-cover ratio "was at least decent," and is also the reason behind the spike higher in yields. "But at the same time, when you get close to 4% on yields, you see a steep drop in the market like we saw," he said.

He characterized the number of indirect bidders as "good," saying it indicates "there is still foreign interest in these bonds." However, he said the interest comes at such a high yield that the only way for bond yields to go now is up.

"The market at this point can still deal with 4%," he added. "What can really counterbalance that higher interest rate is an improving economy."