10-year Treasury yield holds near 3-week high as trade deficit widens

Treasury yields held their ground on Wednesday after the trade deficit widened to a five-month high, which could crimp economic growth in the third quarter and potentially boost demand for bonds.

The 10-year Treasury note yield TMUBMUSD10Y, +0.11% was flat at 2.902%, hovering near a three-week high. The 2-year yield note yield TMUBMUSD02Y, +0.15% was mostly unchanged at 2.653%, while the 30-year bond rate TMUBMUSD30Y, +0.09%  rose 0.6 basis point to 3.074%. Bond prices move in the opposite direction of yields.

The trade deficit in July widened to $50.1 billion, a five-month high, after imports rose 0.9% to a record $261.2 billion. A wider trade deficit may pare third-quarter GDP estimates, which is on track to hit 1.98% on the New York Federal Reserve’s Nowcast model.

Despite tariff fears, U.S. industry shows few signs of slowing. Tuesday’s ISM manufacturing gauge surged to a 14-year high, highlighting the resilience of U.S. factories, for now, to a looming trade war and rising labor costs.

Yet, a larger trade gap could encourage President Donald Trump to take a harder line in trade negotiations with major economic partners like Europe and China. Bloomberg News had reported Trump would impose a new round of tariffs on China as early as this week.

“The July trade data showed that the trade deficit with China reached a new record in July, which may prompt the White House to move ahead [with duties on China],” wrote Oren Klachkin, an analyst at Oxford Economics.

Investors also watched a number of speeches from members of the Fed’s interest-rate setting committee, which is set to conclude its two-day policy-setting gathering on Sept. 26. Minneapolis Fed President Neel Kashkari was scheduled to give a talk at 4 p.m. Eastern, followed by Atlanta Fed President Raphael Bostic at 6:30 p.m.

St. Louis Fed President James Bullard said the Treasury yield curve, the yield gap between short-dated maturities and long-dated maturities, could invert as early as this year. A curve inversion is seen as a prelude to a recession, but Bullard said only a lasting inversion would be meaningful.

Though a rate increase in the September meeting has already been priced in, investors are hoping to glean further clues on the central bank’s rate trajectory beyond next month and whether trade concerns could weigh on the probability of a December rate increase.

Meanwhile, Italian bonds extended this week’s rally as Deputy Prime Minister Luigi Di Maio said the coming budget would keep Italy’s fiscal house in order. Investors are on watch for signs that Italy’s populist government will push forward with a budget that would blow past the European-Union mandated deficit limits.

The 10-year Italian bond yield TMBMKIT-10Y, +0.00% fell 9.5 basis points to 2.941%, after starting off the week at 3.234%, a four-year high. The yield decline helped to narrow the yield gap between the 10-year Italian bond and the German 10-year paper TMBMKDE-10Y, +0.00% a gauge of the relative attractiveness of Italian debt over less risky government paper, to 256 basis points, or 2.56 percentage points, from 289 basis points last Friday.

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