By Min Zeng

The U.S. government bond market rallied 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 settled at 2.544% late Monday, 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. News reports showed Russia's envoy to Turkey was shot and killed in Ankara during a gallery opening at the capital.

Government bonds in Europe, including those in Germany, France, the U.K. and Belgium also strengthened. The 10-year yield in Germany, the benchmark for the eurozone's debt markets, fell to 0.247% from 0.328% Friday, according to Tradeweb.

The yield swing during 2016 in the developed world 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 analysts say government bond yields are in the process of normalization and the rise a healthy sign for the economy. The 10-year Treasury 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 on Monday, 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.

Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle, said it takes time for the spillover effect from higher yields to show up in the broader economy and he is concerned that further rise in bond yields from here would be a drag for U.S. growth next year, much like the big rise in yields during 2013 that affected the growth in the following year.

Mr. Tannuzzo said he has bought Treasury bonds recently, adding that Mr. Trump's fiscal stimulus may fail to live up to high market expectation, a case that is likely to bolster demand for Treasurys.

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. Fed Chairwoman Janet Yellen painted a bright labor-market outlook in a speech on Monday, pointing to signs that wage inflation is picking up. A solid job market is one of the factors that support theFed to tighten monetary policy.

"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, following the Fed's first rate increase in December 2015 since 2006. The turmoil drove investors scrambling into haven bonds and causing U.S. bond yields to drop sharply.

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

(END) Dow Jones Newswires

December 19, 2016 16:15 ET (21:15 GMT)

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