By Min Zeng

Prices of U.S. government bonds pulled back Tuesday after an official report showed the world's largest economy grew at the fastest pace in two years during the July-September period.

But selling in the bond market was moderate. The bond market rout that had accelerated after the U.S. election has been easing off lately as some investors deem the selloff as overdone. Tuesday's big drop in U.S. crude oil prices ahead of Wednesday's global oil cartel OPEC meeting also boost some demand for safer assets, keeping a lid on bond yields' rise.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.341%, according to Tradeweb, compared with 2.319% Monday. Yields rise as bond prices fall.

Gross domestic product, a broad measure of the goods and services produced across the economy, expanded at an inflation- and seasonally adjusted annual rate of 3.2% in the third quarter, the Commerce Department said Tuesday. Economists surveyed by The Wall Street Journal expected growth would be revised up to a 3.0% pace from last month's initial estimate of 2.9%. Growth accelerated from the second quarter's more modest 1.4% pace.

The report "raises the outlook for a December rate hike," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.

Higher interest rates tend to shrink the value of outstanding bonds.

Fed-fund futures, a popular derivative market for hedge funds and money managers to place bets on the Fed's policy outlook, showed a 98% probability of a rate increase by the Fed's Dec. 13-14 meeting. The oddswere 94% Monday.

A separate release Tuesday showed a rise in U.S. consumer confidence this month. A number of releases earlier this month have been solid, including the best two-month stretch of retail sales in at least two years, the fastest pace of housing starts since 2007 while wage growth last month rose at the fastest pace since 2009.

The bond market has been getting hit this month by one of the biggest selloffs following the financial crisis, driven by mainly by the prospect of expansive fiscal and economic policy advocated by President-elect Donald Trump. The 10-year yield has jumped from 1.834% at the end of October, headed for the biggest monthly increase since 2009.

Traders say the big rise in bond yields already reflects a brighter sentiment toward the U.S. growth outlook, and Tuesday's report on the third-quarter economic growth simply confirmed the assessment.

The bond rout has been easing off lately. The 10-year yield rose above 2.4% last week to trade at the highest since July 2015 but failed to sustain above that mark. Traders say buying interest perked up around this level as some investors deem the selloff as overdone. They are skeptical over the size of Mr. Trump's fiscal stimulus and its efficacy over the broader economy in the longer term.

Traders say higher yields are a boon for pension funds and insurance firms, which have been struggling to obtain income in a low-yield world. These institutional investors need high-grade long-term fixed-income assets to match their long-term obligations.

A closely-tracked indicator of the bond market sentiment shows the bear camp is pulling back.

Investors who expect lower bond prices or higher yields fell to 18% for the week that ended Monday, according to the weekly Treasury client survey from J.P. MorganChase & Co. released Tuesday. The share was down from 20% a week ago and 23% twoweeks ago. Those who expect higher bond prices were steady at 14% and the fence-sitting camp ticked up to 68% vs. 66% a week ago.

Month-end demand may keep a lid on bond yields.

During the last trading session of a month, newly minted bonds replace maturing debt in bond indexes. Fund managers who track these indexes need to replicate the move by buying bonds and the focus tends to be longer-term debt.

Some investors believe bond yields have room to rise in the months ahead even if they may pull back near-term. They see it as part of the process for the bond market to normalize from a prolonged era of ultra-low yields driven by soft growth, low inflation and ultraloose monetary stimulus among major central banks.

They argue that higher Treasury yields is a healthy sign as it reflects a brighter assessment toward the economy, which has generated higher inflation expectation. Inflation chips away bonds' fixed return over time and investors are demanding higher premium in the bond market to hedge against inflation risks.

Bond yields remain low from a historical standpoint. The 10-year yield has surged nearly 1 percentage point from its record close low set in July, but it traded at 3% in early 2014. Even with the rise this month, it is less than half of the level it traded in 2007.

Investors had piled into bond funds after the financial crisis. Following the U.S. election, money has been flowing out of bond funds and into stocks funds. Some analysts say that if the flow out of bond funds and into stocks picks up momentum, it would send bond yields higher still.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

November 29, 2016 10:41 ET (15:41 GMT)

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