By Min Zeng

The U.S. government bond market turned around from an earlier bout of price declines, though it was still headed for one of the biggest monthly selloffs since the financial crisis.

Bond prices initially fell after an official report showed the world's largest economy grew at the fastest pace in two years during the July-September period. The report added to a brighter market assessment over the U.S. growth outlook and sapped demand for haven bonds.

Buying from fund managers to prepare for regular month-end adjustments in bond indexes led to a price rebound. On the last trading session of each month, newly minted bonds replace maturing debt in bond indexes. Fund managers who track these indexes need to replicate the move by buying bonds. Some investors decided to do the allocation Tuesday to avoid potential price swings Wednesday.

A 3.9% drop in crude oil prices Tuesday also boost demand for Treasury debt. Higher oil prices tend to boost expectation for inflation, a big threat to the value of long-term Treasury bonds.

The oil selloff drove investors to take some chips off the table on their inflation bets, traders say. In doing so, these investors sold Treasury inflation-protected securities and buy Treasury bonds, contributing to lower Treasury yields.

After rising to 2.35% earlier in the session, the yield on the benchmark 10-year Treasury note settled at 2.305%, compared with 2.319% Monday. Yields fall as bond prices rise.

The 30-year bond was the best performer, with its yield closing at 2.953%, compared with 2.982% Monday.

The 10-year yield has jumped by nearly half of a percentage point in November. At one point last week when the selling hit a peak, the yield had logged the biggest monthly rise since 2009. Few analysts and investors had anticipated a round trip from a big drop in yields earlier this year.

Treasury debt over all have handed investors a negative return of 2.48% this month through Monday, shrinking the year-to-date return to 1.34%, according to Bloomberg Barclays indexes data. Return includes bond price changes and interest payments.

The selloff in Treasury debt has been rippling into other parts of U.S. fixed-income markets. The biggest loser this month in the U.S. fixed income universe was municipal bonds with a negative return of 3.03%, followed by a negative 2.58% on U.S. investment-grade corporate bonds. U.S. junk debt posted a negative 0.57% return and mortgage-backed securities logged a negative 1.65% return.The big rise in Treasury yields has been driven mainly by the prospect of expansive fiscal and economic policy advocated by President-elect Donald Trump. Investors have been shedding bonds because they are concerned that the policy outlook may lead to stronger growth, higher inflation and a faster pace of interest rate increases by the Federal Reserve. All these factors tend to shrink the value of outstanding bonds.

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.

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. Morgan Chase & Co. released Tuesday. The share was down from 20% a week ago and 23% two weeks ago.

Some investors believe bond yields have room to rise. They see it as part of the process for the bond market to normalize from a prolonged era of ultralow yields driven by soft growth, low inflation and ultraloose monetary stimulus among major central banks.

Even with the rise this month, the 10-year Treasury yield was less than half of the level it traded in 2007.

Write to Min Zeng at

(END) Dow Jones Newswires

November 29, 2016 15:58 ET (20:58 GMT)

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