Treasuries Pull Back Off Best Levels But Remain Positive

Following the pullback seen in the previous session, treasuries moved back to the upside during the trading day on Thursday.

Bond prices gave back ground after an early rally but remained in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 2.5 basis points to 2.457 percent after hitting a low of 2.425.

The rebound by treasuries came amid renewed trade concerns following tough talk from President Donald Trump ahead of two days of U.S.-China trade talks in Washington.

Trump claimed during a rally in Florida on Wednesday that the U.S. is planning to raise tariffs on Chinese goods because China “broke the deal.”

“So they’re flying in, the vice premier tomorrow is flying in — good man — but they broke the deal,” Trump told his supporters. “They can’t do that, so they’ll be paying.”

The comments from Trump come as Chinese Vice Premier Liu He is set to take part in the latest round of trade talks as officials from the world’s two largest economies attempt to reach an historic trade agreement.

Treasuries pulled back off their best levels after Trump told reporters at the White House a trade deal with China is still possible but called tariffs an “excellent” alternative.

Analysts have previously urged investors to focus on Trump’s actions rather than his words, suggesting that the president’s bluster is merely a negotiating tactic.

On the U.S. economic front, the Commerce Department released a report on Thursday showing the U.S. trade deficit widened in the month of March.

The report said the trade deficit widened to $50.0 billion in March from a revised $49.3 billion in February. Economists had expected the deficit to widen to $50.2 billion.

The wider trade deficit came as the value of imports surged up by 1.1 percent to $262.0 billion compared to a 1.0 percent jump in the value of exports to $212.0 billion.

The Labor Department also released a report showing producer prices increased in line with economist estimates in the month of April.

The report said producer price index for final demand rose by 0.2 percent in April after climbing by 0.6 percent in March. The uptick in prices matched expectations.

Excluding food and energy prices, core producer prices inched up by 0.1 percent in April after rising by 0.3 percent in March. Economists had expected core prices to edge up by 0.2 percent.

A separate Labor Department report showed first-time claims for U.S. unemployment benefits pulled back by less than expected in the week ended May 4th.

The Labor Department said initial jobless claims dipped to 228,000, a decrease of 2,000 from the previous week’s unrevised level of 230,000. Economists had expected jobless claims to drop to 220,000.

Meanwhile, traders largely shrugged off the results of the Treasury Department’s auction of $19 billion worth of thirty-year bonds, which attracted modestly below average demand.

The thirty-year bond auction drew a high yield of 2.892 percent and a bid-to-cover ratio of 2.20, while the ten previous seven-year note auctions had an average bid-to-cover ratio of 2.27.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Reaction to news out of the U.S.-China trade talks is likely to drive trading on Friday, overshadowing the Labor Department’s typically closely watched report on consumer price inflation.

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