US Treasury yields rose in afternoon trade ahead of Thursday's fourth-quarter gross domestic product figure, despite the growth slowdown suggested by Wednesday's report that the US goods trade deficit widened significantly in December.
The Commerce Department said the goods trade gap jumped 12.8 percent to $79.5 billion in December as slowing global demand and a strong dollar weighed on exports. Exports declined 2.8 percent and imports rose 2.4 percent. The federal government on Thursday will report US economic growth for the fourth quarter of 2018. The 10-year Treasury yield typically serves as a proxy for investors' overall view of the health of the US economy, so the 5.7 basis point rise on Wednesday morning was unexpected given the trade data.
"Everyone is a little surprised by the move in New York," said Justin Lederer, Treasury analyst at Cantor Fitzgerald. He said the rise in rates was likely driven by technical factors. "Sellers have emerged. There have been some sizeable block-future trades in 10-years and (30-year) bonds and a lot of Europe is backing up with big activity in (German) Bunds. Positioning may be off given the way auctions were received yesterday and ahead of a big month-end extension tomorrow."
Strong demand at new note auctions this week saw direct bidders, a group that includes bond dealers and large investment managers, on Tuesday purchase their largest share of seven-year notes at auction in almost five years. Tom di Galoma, managing director at Seaport Global Holdings in New York, further explained that the selloff in Treasuries was likely on the back of a similar move in European government bonds. The benchmark 10-year German Bund hit a three-week high of 0.168 percent.
"There are some days where the price action itself is the main story, and Wednesday certainly fit in that category. At the risk of over-using the term, prices can change more than facts as the fundamental landscape remains intact," wrote Ian Lyngen, head of US rates strategy at BMO Capital Markets.
The yield curve was steeper as two-year yields rose at a slower rate than 10-year yields. The two-year yield moves in step with market forecasts of interest rate policy, but Wednesday's move seemed disconnected from Federal Reserve Chairman Jerome Powell's remarks to Congress on Wednesday, in which he said the US central bank would stop shrinking its $4 trillion balance sheet later this year.