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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.

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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.