Government bonds ended lower Wednesday ahead of a crucial auction of 10-year notes and a key inflation reading, as the second leg of the Treasury's quarterly refunding failed to sustain the previous session's gains.

The 10-year note ended down 12/32 in price, pushing its yield up to 4.8% in a session rife with stimuli. The 30-year note fell 29/32 to yield 5.52%. Weighing on sentiment was a surge in oil prices and a government report showing that the U.S. trade deficit widened to $45.96 billion in March from a revised February gap of $42.12 billion.

In general, the bond market continues to limp as players adjust to expectations for a

Federal Reserve

interest rate hike in June. The 10-year note's yield, which moves inversely to price, currently stands at a 22-month high, and it is about 115 basis points above its March 2004 low.

The March trade deficit was swollen by higher oil prices, which raised the value of imported goods. Another report painted a somewhat tamer inflation picture, showing that import prices rose 0.2% in April after jumping 0.8% in March. Economists are looking for more signs of price pressure in the producer price index, released Thursday, and the consumer price index, released Friday. Both are expected to show 0.3% increases.

Another major factor in Wednesday's bond picture was the second leg of the Treasury's quarterly refunding, in which $15 billion of five-year notes were sold. The notes were auctioned at a low bid of 3.927%, slightly better than expected, with demand outstripping available securities by a factor of about 2.64. That's considered pretty good, though less robust than in previous auctions.

On Tuesday, the Treasury sold $24 billion of new three-year notes at a better-than-expected yield of 3.19%, with a bid-to-cover ratio of 2.27%. Overseas demand in that auction was brisk, but the level of so-called indirect bidders in Wednesday's auction was slightly weaker than expected, at 34%. The level was 41% in the last auction of five-year notes and was 45.6% on Tuesday.

The government will sell $15 million of 10-year notes Thursday.

On the bright side, the Treasury reported that the U.S. government ran at a $17.6 billion surplus in April, slightly stronger than expected although still the worst April showing in a decade. Receipts were down about 5% from a year ago because of larger income tax refunds, but for the first seven months of the fiscal year, receipts are up 1.3% to $1.070 trillion.