By Sam Goldfarb

U.S. government bonds strengthened Monday, showing some signs of positive momentum after three consecutive weeks of yield increases.

In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 2.319%, compared with 2.359% Friday. Yields fall when bond prices rise.

Bonds have sold off sharply since Donald Trump's victory in the Nov. 8 presidential election, as investors respond to the increased chances of fiscal stimulus next year.

Investors have calculated that large tax cuts, increased deficit spending, and the rollback of regulations should boost economic growth in the coming years, leading to higher inflation and a faster pace of interest-rate increases by the Federal Reserve.

A flood of new bonds to finance a growing budget deficit would dilute the value of outstanding government debt. So would higher inflation and interest rates, while faster growth could lead investors to sell government debt in favor of riskier assets.

If current projections prove accurate, Mr. Trump's victory could represent a turning point for bond yields, which reached record lows earlier this year on concerns that the world was stuck in a low-growth, low-inflation environment, accompanied by ultraloose monetary policies from central banks.

Still, some investors and analysts have cautioned that the selloff may be due for a pause, partly due to the hazards of predicting government policy even with Republicans controlling Congress and the White House.

In a sign that buyers might be returning to the market, an auctionof seven-year Treasury notes drew robust demand Wednesday, after sales of two-year and five-year notes met with soft receptions earlier in the week. The highlight was 72.7% indirect bidding, the highest on record, according to Jefferies LLC. The category is a proxy of demand from foreign investors including both private investors and foreign central banks.

The yield on the 10-year note reached 2.417% Wednesday morning, its highest intraday level since July 2015, but declined immediately following the auction, according to Tradeweb.

As bonds continued to strengthen Monday, pre-auction yields are looking like "a near-term top," said John Herrmann, rates strategist at MUFG Securities in New York.

Eventually, though, Mr. Herrmann still expects yields to climb higher as the economy picks up strength next year.

Apart from the outlook for fiscal policy, economic data released in November has pointed to a brighter growth outlook and added to the selling in the bond market.

Among the highlights were the best two-month stretch of retail sales in at least two years, the fastest pace of housing starts since 2007, and strong demand for long-lasting manufactured goods.

Any rally in the bond market this week should be supported by the typical buying that occurs at the end of each month, as some investors add government bonds to their portfolios to match the swelling volume in indexes they track. But it could be tested by new economic data, including the Fed's preferred measure of inflation Wednesday and employment numbers Friday.

COUPON ISSUE Price CHANGE YIELD CHANGE

1% 2-year 99 25/32 up 1/32 1.111% -1.2BPS

1% 3-year 98 30/32 up 3/32 1.370% -2.9BPS

1 3/4% 5-year 99 24/32 up 6/32 1.801% -3.6BPS

2 1/8% 7-year 99 31/32 up 10/32 2.132% -4.6BPS

2% 10-year 97 6/32 up 11/32 2.319% -3.9BPS

2 7/8% 30-year 97 29/32 up 16/32 2.982% -2.5BPS

2-10-Yr Yield Spread: +120.8BPS Vs + 123.6BPS

Source: Tradeweb/WSJ Market Data Group

(END) Dow Jones Newswires

November 28, 2016 15:51 ET (20:51 GMT)

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