U.S. government debt yields rose Wednesday as investors monitored trade relations between the U.S. and China and its potential impacts to momentum of the American economy.
Wall Street's renewed anxiety over negotiations between Beijing and Washington began Sunday, when President Donald Trump tweeted that current 10% tariffs on $200 billion of goods imported from China will be increased to 25% on Friday.
Trump's weekend message — which at the time appeared to come without provocation — was preceded by a diplomatic document from China that included reversals that undermined key U.S. demands, Reuters reported Wednesday.
In each of the seven chapters of the draft trade deal, Beijing reportedly removed commitments to change laws to remedy theft of intellectual property, reneged on access to financial services, and deleted agreements on currency manipulation. High-level Chinese and U.S. officials will meet in Washington over the next two days in an attempt to reach a permanent solution and avoid the telegraphed tax increase.
Meanwhile, China's Commerce Ministry said later on Wednesday that Beijing will respond if the U.S. hikes tariffs to 25%.
"The escalation of trade friction is not in the interests of the people of the two countries and the people of the world," the ministry said. "The Chinese side deeply regrets that if the US tariff measures are implemented, China will have to take necessary countermeasures."
With trade relationships and economic growth concerns back in the limelight, Wall Street has pivoted toward assets believed to be safer, such as government debt.
"Say goodbye to that hoped for 2nd half recovery if we can a ramp up in trade tensions with China," Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in an emailed note. "I'm all for getting China to change their ways and protecting US interests but the tool of tariffs in order to achieve it has its consequences."
China's exports unexpectedly fell and its imports rose for the first time in five months in April, according to customs data released Wednesday. Exports fell 2.7% year over year in April following 14.2% rally in March, falling short of consensus estimates for a 3.0% increase.
The Treasury Department auctioned $27 billion in 10-year notes a high yield of 2.479%. The bid-to-cover ratio, an indicator of demand, was 2.17. Indirect bidders, which include major central banks, were awarded 53.3%. Direct bidders, which includes domestic money managers, bought 11.5%.
— CNBC's Silvia Amaro contributed reporting.