By Akane Otani 

U.S. government bonds were hit by a fresh wave of selling Wednesday, pushing the yield on the benchmark 10-year Treasury note to levels not touched since May.

The yield on the 10-year Treasury note, used as a reference for everything from mortgages to student-loan rates, was recently at 3.083%, compared with 3.048% Tuesday.

Bond yields, which rise as prices fall, have steadily risen throughout the week, surprising analysts who had expected the latest flare-up in trade tensions to stoke demand for Treasurys and push yields lower.

Instead, bond selling accelerated after the Trump administration said at the start of the week that it would impose a 10% tax on about $200 billion in Chinese goods starting Sept. 24 and continued to pick up steam after China hit back Tuesday with another round of tariffs.

To some analysts, the pickup in bond yields has reflected both relief that the U.S.' announced tariffs were less severe than expected, as well as pressure from a large amount of new corporate debt being sold this week. Corporate issuance can pressure the bond market by pushing investors to sell Treasurys to make room in their portfolios for other debt.

There has been a "miserable tone in Treasurys" this week, said Jim Vogel, head of government bond strategy at FTN Financial, in a note. Some of the selling pressure may also have been driven by a reluctance among buyers to scoop up bonds ahead of the Federal Reserve's meeting next week, Mr. Vogel added.

Investors are widely expecting the Fed to raise short-term interest rates again. What is less certain is what the central bank will signal it plans to do the rest of this year and next year, something that will be heavily influenced by the trajectory of inflation and growth in the U.S.

Inflation's "presence or lack of presence is likely the most important metric for rates between now and the end of the year," said Kevin Giddis, head of fixed income capital markets at Raymond James, in an email.

Any signs of cooling in wage growth or household spending -- both of which have recently picked up and pointed to inflationary pressures -- could offer the bond market a reprieve after its latest downturn.

"If either of these metrics falls back in line, then we will likely settle back into the seat that pushes the 10-year back below 3% and drops volatility back to once again, a near slumber level of movement," Mr. Giddis said.

Write to Akane Otani at akane.otani@wsj.com

 

(END) Dow Jones Newswires

September 19, 2018 12:25 ET (16:25 GMT)

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