Stocks gain as economic news offsets weak Treasury auction

— -- Stocks closed higher Wednesday after clawing back some of the ground they'd lost in a brief panic attack over the direction of interest rates.

The Dow Jones industrial average ended the day 89.84 points, or 1.2%, higher at 7749.81, even though traders dumped stocks at midday over weak auctions of government debt in both the U.S. and United Kingdom.

Fanned by upbeat economic data, the Dow had been up as much as 203 points early in the day. But concerns over the direction of interest rates pulled the Dow down as much as 110 points. In the end, bulls won out, pushing the Dow up 178 points in the final hour of trading, 117 of which came in the last 30 minutes.

Investors had all sorts of conflicting news to chew on. On the bright side, a report showing better-than-expected sales of durable goods — big-ticket items such as airplanes and appliances — and surprisingly strong new-home sales added credibility to the hope that the economy is showing signs of life.

But at midday, optimism briefly disappeared as investors worried about an auction of $34 billion in five-year Treasuries at a higher-than-expected yield, indicating lower-than-expected demand. Earlier, an auction of British debt didn't attract enough buyers to soak up the amount being sold.

The British auction unnerved U.S. investors, who feared similar problems could spread, says Bill Larkin of Cabot Money Management. Larkin, though, points out that the British auction was for 40-year bonds, which can be harder to sell.

Worries about the supply of government debt hitting the market pushed the yield on the 10-year Treasury, which moves opposite price, to 2.79% from 2.71%. Debt buyers don't want to pay too much for Treasuries as they brace for the government to continue selling additional supply, says John Spinello at Jefferies. "The supply is overwhelming."

Disruptions in the government debt market underscore how tentative the economic recovery remains, says Linda Duessel of Federated Investors. Duessel still thinks the Standard & Poor's 500 could retest its lows in the area of the "low 600s." The S&P 500 rose 1.0% to 813.88 Wednesday.