By Min Zeng

The bond market strengthened Monday after the biggest six-week selloff in more than seven years.

Buyers stepped in, sending the yield on the benchmark 10-year Treasury note down from its highest level in more than two years. The yield was recently at 2.533%, according to Tradeweb, compared with 2.6% Friday, which was the highest close since September 2014. Yields fall as bond prices rise.

Traders say the yield around 2.6% lured buyers who deem the bond rout overdone. The yield has surged by more than 1 percentage point after falling to a record low in the summer.

Geopolitical news added to demand for haven bonds and contributed to lower bond yields, traders said. Russia's envoy to Turkey was shot and seriously wounded in Ankara during a gallery opening at the capital, according to Turkey's state-run Anadolu news agency.

The yield swing this year reflects a sentiment shift among global investors. Earlier this year, expectations over a prolonged era of sluggish growth, low inflation and large monetary stimulus from major central banks in Japan and Europe had sent investors piling into government bonds, especially long-term debt.

The tide has been turning over the past few months as data pointed to improvement in global manufacturing and upticks in inflation. The prospect of large fiscal spending, lower taxes and lighter regulation accentuated the narrative toward stronger growth, higher inflation and less generous monetary policy. The 10-year yield was up 0.817 percentage point during the previous six weeks, the most on a six-week basis since June 2009.

Investors and analystssay the yield is in the process of normalization and its rise a healthy sign for the economy. The yield was up modestly from 2.273% at the end of 2015. Some expect the yield to rise to 3% in coming months, a level traded in early 2014.

So far the big rise in yields hasn't rattled the U.S. stock market. One popular trade since the U.S. election has been to sell Treasurys and buy stocks, sending equity indexes to record high levels last week. The Dow Jones Industrial Average was near 20,000, which it has never reached.

Luca Paolini, chief strategist at Pictet Asset Management, said he is concerned that the trade "is getting crowded."

"Everybody is bullish on the growth outlook," said Mr. Paolini. He said the risk is that policy details and implementation may disappoint, which may drive investors to sell riskier assets and flock to Treasury bonds.

Some money managers and analysts say a further rise in bond yields may undermine the U.S. growth momentum.

Higher yields push up long-term borrowing costs for U.S. consumers and businesses. Mortgage rates already increased over the past few weeks. Higher yields have boosted the attractiveness of the U.S. dollar, which reached a 14-year high last week. A stronger dollar hurts U.S. exports and eats into earnings of U.S. firms from overseas operations. It is also driving capital out of developing countries and hurting the growth prospects of local economies.

China's currency has been falling to its lowest against the dollar in more than eight years. Last week, China's bond market suffered a massive selloff, flagging the risk of global ripples from higher U.S. bond yields and a stronger dollar. The selloff was driven partly by the Federal Reserve's latest signal last week of three interest rate increases in 2017.

"There is a whiff of unease from China," said Jim Vogel, interest rates strategist, at FTN Financial.

China's plunging stocks and currency was a main driver causing a U.S. stock swoon in the early part of this year. That drove investors scrambling into haven bonds and causing U.S. bond yields to drop sharply.

Fed Chairwoman Janet Yellen is scheduled to speak Monday afternoon and investors will home in on her comments on the growth outlook.

The Treasury bond market overall has handed investors a 0.11% return this year through Friday, according to Bloomberg Barclays bond indexes data. The sector logged a 6.2% return between the end of last year and July 8, when the 10-year yield closed at a record low 1.366%.

Long-term bonds have suffered even more. Treasury debt maturing in 10 years or more posted a negative 0.97% return this year through Friday, after logging 19% return through July 8. Total return includes bond price changes and interest payments.

Write to Min Zeng at

(END) Dow Jones Newswires

December 19, 2016 12:47 ET (17:47 GMT)

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