Trade Deficit at highest level in over a year

Treasury prices are trading lower this morning as the Commerce Department announced that the trade imbalance increased slightly less than expected for the month of March. The 2-year note has dropped 2/32 yielding 0.86% while the 5 year note has declined 6/32 higher to yield 2.27%. The benchmark 10-year has eroded in price 10/32 to yield 3.56% while the long bond has moved 18/32 lower to yield 4.46%. For the record, the Commerce Department announced that the trade gap between imports and exports continued to widen for March (+2.5%), but at a lower level than predicted, reaching $40.40 billion versus the expected $40.50 billion. This new level is still the highest recorded since December 2008.

Data Source: Bloomberg L.P. Chart by the Fixed Income Strategies Group RBC WM

The previous month’s revision was lowered by $300 million to -$39.4 billion. Although total exports increased 3.20% in the month of March, reaching $147.87 billion, it was no match for the 3.07% increase in MoM imports totaling $188.29 billion for the same period. The higher than expected trade imbalance can be attributed to a healthier US economy that increased domestic demand in products such as crude oil (+13.20%) and automotive imports (+7.70%). Although the trade deficit can be considered a lagging indicator, this widening imbalance supports the likelihood that the Federal Reserve will keep the overnight lending rate at its current 0.00 – 0.25% range as net exports is a component of GDP. Consequently, higher negative net exports would have a negative impact on the next 1Q2010 GDP report scheduled to be released on May 27th.

In other relevant news the Treasury will auction today $24 billion of a 10-year note issue at noon CDT in the second of three auctions scheduled for this week. Tomorrow’s final auction of $16 billion 30-year bonds will bring the total for the week to $78 billion. All three issues will settle on Monday, May 17.