Protests in Spain and Greece put the European sovereign debt crisis centre stage, renewing investors' worries about the risk the euro zone's problems pose to global growth and corporate profits.
Those concerns are underpinning demand for fixed-income securities including US Treasuries, and helped fuel appetite for today's auction of US$35 billion of five-year bonds.
"It was a good auction," Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, which as a primary dealer is obliged to bid in US debt offerings, told Bloomberg News. "It is suggesting more and more fear - that things could spiral out of control in Europe. The demand for dollars and Treasuries continues to rise."
All eyes are on Spain, which is scheduled to announce its budget tomorrow. And on Friday, Moody's will publish its latest review of the nation's credit rating. In contrast to rising demand for US government bonds, the yield on Spain's 10-year bond surged more than 30 basis points back through the 6-per cent mark.
Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 per cent of gross domestic product this year, and on Wednesday the Bank of Spain said the economy continued to shrink markedly in the third quarter, according to Reuters.
Spain's prime minister, Mariano Rajoy, has so far resisted the calls to ask for an EU financial bailout but may not be able to hold out much longer.
In a speech in New York earlier today, Rajoy said all Spaniards were going to have to make sacrifices.
Europe's Stoxx 600 Index ended the session with a 1.8 per cent slide. National benchmark indexes in Germany, France and the UK dropped. So did Spain's IBEX 35 Index, closing 3.9 per cent lower.
In late afternoon trading in New York, the Dow Jones Industrial Average shed 0.16 per cent, the Standard & Poor's 500 declined 0.38 per cent, while the Nasdaq Composite Index fell 0.62 per cent.
Meanwhile, the latest indicator on the US housing market continued to underwrite the view that at least this part of the economy is gaining forward momentum.
Sales of new homes eased 0.3 per cent to a 373,000 annual pace in August after a revised 374,000 rate in July that was better than previously estimated and the strongest since April 2010, according to Commerce Department data. And the average price of a home in the US has now risen to its highest since March 2007.
"There are increased signs that the housing recovery is now on a more sustainable path, though its impact on overall economic activity will remain relatively modest at best over the near-term," Millan Mulraine, a senior economist at TD Securities in New York, told Reuters.