By Min Zeng

Prices of U.S. Treasury bonds pulled back Tuesday as investors gird for the last round of new government debt offerings in 2016.

Higher stocks and crude oil prices reflect investors' preference for riskier assets, also sapping demand for haven bonds. The Dow Jones Industrial Average traded near 20,000, a level it has never crossed.

The yield on the benchmark 10-year Treasury note was 2.567%, near the highest level in more than two years, according to Tradeweb, compared with 2.542% Friday. Yields rise as bond prices fall. The bond market was shut Monday for the Christmas holiday.

The Treasury is scheduled to sell $26 billion of two-year notes at 1 p.m. Tuesday, followed by a $34 billion sale of five-year notes Wednesday and a $28 billion sale of seven-year notes Thursday. A $13 billion sale of two-year floating-rate notes is also scheduled for Wednesday.

The auctions will be a test of demand following the Federal Reserve's interest-rate increase two weeks ago. Yields on short-term notes, such as the two- and five-year notes, are highly sensitive to the Fed's interest-rate policy.

Trading is thinner than normal due to the holiday season, which may exaggerate part of the price moves, say analysts. Some traders say this condition may also affect demand for this week's auctions as some investors may stay on the sidelines and wait for the new year to make fresh investment decisions.

Government bond yields in the developed world have been rising after falling to their historic lows in the summer. The 10-year Treasury yield is up more than 1 percentage point from its record low set in early July. The yield was headed for a second consecutive year of gains, up from 2.273% at the end of 2015.

The shift toward higher yields over the past few months reflect rising expectations among investors toward a brighter growth outlook, higher inflation and potentially a faster pace of interest-rate increases by the Federal Reserve.

Selling in the bond market had intensified after the U.S. election in early November. The prospect of expansive fiscal policy from President-elect Donald Trump in the coming year has added to expectation toward stronger economic growth and higher inflation. The Fed raised interest rates for the first time this year two weeks ago and projected three rate increases for 2017, adding to expectations of higher bond yields.

All thee factors "are not going away and are likely to continue to pressure bond yields higher in 2017," said Praveen Korapaty, head of interest rate strategy at Credit Suisse.

Some investors and analysts say the bond market is on the process of normalizing from ultralow levels and that there is room for the yield to go higher if U.S. growth gains more traction. The 10-year yield was still less than half of where it traded in 2007.

Stocks and corporate bonds have outpaced Treasury debt this year. The Dow has handed investors a total return of 14% this year through Friday, according to FactSet. U.S. corporate bonds issued by lower-rated firms, or junk bonds, have logged a total return of 17% over the same period, beating 0.5% on Treasury debt, according to Bloomberg Barclays bond indexes data. Return includes price changes and interest or dividend payments.

The selling pressure eased last week, with the 10-year yield posting the first weekly decline in seven weeks. Some analysts say the selloff is overdone and that the 10-year yield around 2.6% attracts some buying interest.

Tom Girard, head of fixed income at New York Life, said bond yields would fall in 2017 if details and implementation of fiscal stimulus failed to live up to market expectations.

Mr. Girard said higher bond yields make bonds more appealing to buy, especially for pension funds and insurance firms, which need high-grade long-term financial assets to match their long-term obligations.

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

(END) Dow Jones Newswires

December 27, 2016 10:27 ET (15:27 GMT)

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