By Min Zeng

U.S. government bonds strengthened for a second consecutive session Thursday, sending the yield on the benchmark 10-year note below 2.5%, as the last Treasury debt offering in 2016 drew strong demand.

The yield on the benchmark 10-year Treasury note settled at 2.477%, the lowest close since Dec 9, compared with 2.51% Wednesday. Yields fall as bond prices rise.

The bond market has been regaining some poise after one of the biggest selloffs since the financial crisis. Bond yields have jumped since the U.S. election day, reflecting market expectation that the prospect of expansive fiscal policy from President-elect Donald Trump will lead to astronger economic growth and higher inflation. One popular trade since the election has been selling Treasury bonds and buying stocks.

The 10-year yield has been pulling back after closing at a two-year high of 2.6% earlier this month. It was 1.867% on the election day.

A well-bid five-year note auction sparked a price rally in the bond market on Wednesday. Thursday afternoon's seven-year notes were sold at a yield of 2.284%, down from 2.305% before the auction. That suggests that demand was stronger than dealers had anticipated.

The highlight for the $28 billion sale was 19% direct bidding, a category that include buying from large domestic institutional investors, which was the highest in more than two years. Analysts say it suggests that the auction got a boost from pension funds rebalancing their portfolios following strong gains in stocks and the selloff in bonds since the U.S. election.

Pension funds typically havea targeted allocation among different asset classes, so they need to readjust the allocation ratio on either a quarterly or monthly basis.

Month-end demand also supports the bond market, say traders. At the end of each month, newly-minted bonds replace maturing debt in some bond indexes. Fund managers who closely track these indexes need to replicate the changes by buying bonds.

Indirect bidding for the seven-year note was decent at 64%. This is a proxy of demand from foreign investors. Indirect bidding for the five-year note sale Wednesday reached a record high of 71.4%.

U.S. bonds continue to offer higher yields than their peers in Europe and Japan, attracting buyers looking for relative value in government bonds of the developed world.

Trading is thinner than normal due to the holiday season, which tends to exaggerate part of the price moves, say analysts. The bond market will close at 2 p.m. Friday and will remain shut next Monday to observe the New Year's holiday.

"The usual month-end buying will need to take place in these illiquid conditions, but there also may be even more money flowing into fixed income than usual" if U.S. stocks fail to gain more traction into year-end, said Anthony Cronin, a Treasury bond trader at Anthony Cronin, a Treasury bond trader at Société Générale SA.

After more than an 8% rally since Election Day, the Dow Jones Industrial Average stock index has failed to gain traction lately and traded near 20000, a level it has never crossed.

Government bond yields in the developed world have been rising after falling to their historic lows in the summer. The 10-year yield was headed for a second consecutive year of gains, up from 2.273% at the end of 2015.

Some analysts say the bond market selloff has reflected optimism over fiscal stimulus. The risk, they say, is that Mr. Trump's policies may fail to live up to market expectations, which is likely to drive investors to lighten up on stocks and embrace Treasury bonds again.

"These are the things that the bond market is beginning to consider, which is why we have seen a drop" in the 10-year yield from its recent peak, said Kevin Giddis, head of fixed income capital markets at Raymond James.

Mr. Giddis said bond yields may slide further if negative wagers on the bond market are pared back. In this case, investors need to buy bonds, known as covering shorts.

Hedge funds and money managers accumulated a net $66.7 billion in Treasury futures contracts betting on higher bond yields for the week that ended Dec. 20, according to data from TD Securities. The amount reached $71.87 billion two weeks earlier, the most on a weekly basis since 2008, when TD started to track the data.

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

(END) Dow Jones Newswires

December 29, 2016 16:14 ET (21:14 GMT)

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