By Min Zeng

Prices of government bonds on both sides of the Atlantic ended the first trading session of 2017 on a down note, as a round of global manufacturing and inflation reports brightened the economic outlook and sapped demand for relatively safer assets.

The yield on the benchmark 10-year Treasury note closed at 2.450%, compared with 2.446% at the end of 2016. Yields rise as bond prices fall.

Government bond yields in Europe rose broadly. The yield on the 10-year German bund rose to 0.25%, and the yield on the 10-year U.K. gilt increased to 1.31%, according to Tradeweb.

Selling was the strongest during the early morning session, which pushed up the10-year Treasury yield above 2.5%. The U.S. bond market's price declines then narrowed as investors' appetites for some riskier assets pulled back.

U.S. oil prices fell 2.6% on Tuesday and eliminated an earlier price rally. The Dow Jones Industrial Average stock index pared its price strength.

Tuesday's price swings in the financial markets reflect some concerns over the momentum of the reflation trade that had been a key theme since the U.S. election in early November, highlighted by investors selling government bonds to buy stocks and some other riskier assets.

Investors have bet that the prospect of large fiscal spending, lower taxes and lighter regulations will lead to stronger growth and higher inflation. Inflation chips away bonds' fixed returns over time and is a big threat to long-term government bonds.

The yield on the 10-year Treasury note has climbed from the close of 1.867% on the U.S. election day of Nov 8.The Dow has been climbing over the same span and is near 20000, a level it has never crossed.

"The question will be: Will hope be fulfilled or fade away in the first 100 days?" said Kevin Giddis, head of fixed-income capital markets at Raymond James.

Some say the reflation trade has room to run.

"As long as we continue to receive positive economic data," the market "is going to give the benefit of the doubt to the reflation trade unless [Mr.] Trump fails to enact his campaign promises," said Mary Ann Hurley, vice president of fixed-income trading in Seattle at D.A. Davidson & Co.

Ms. Hurley said her strategy is to sell Treasury bonds if yields slide.

The 10-year Treasury note's yield has been up more than 1 percentage point from its record close low set in early July, reflecting a sentiment shift away from worries over soft growth and low inflation.

Tuesday's data showed the monthly manufacturing indicator inthe U.S. advanced to the highest in two years. China's manufacturing sector grew at the fastest pace last month in three years, according to a private manufacturing survey released Tuesday. In the U.K., a gauge of manufacturing rose to the highest since June 2014.

In addition, regional consumer prices data in Germany suggested higher inflation in eurozone's biggest economy. In the U.S., the component of prices paid from the manufacturing report rose to the highest since 2011, raising concerns that producers would pass over higher costs to consumers.

Some analysts say corporate debt supply is likely to spring up as the new year started, which would weigh down on Treasury debt prices.

Companies typically sell Treasury debt to hedge unwanted interest-rate volatility when they plan to sell new debt, reflecting the Treasury market's important role in global finance. Corporate bonds offer higher yields than comparable Treasury debt,luring investors seeking income in a still very low yield world.

The 10-year yield closed at 2.6% on Dec 16., the highest since September 2014. Selling pressure eased during the winter holiday season as some pension funds and money managers sold stocks to buy bonds for quarter end adjustments.

Many big banks expect bond yields to rise further this year. In a Wall Street Journal survey of 16 big banks last month, Deutsche Bank AG expected the 10-year yield to rise to 3.1% at the end of 2017. Credit Suisse Group AG and the Royal Bank of Canada both expected 3%. J.P. Morgan Chase & Co. said 2.85% and Goldman Sachs Group Inc. said 2.75%.

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

(END) Dow Jones Newswires

January 03, 2017 16:11 ET (21:11 GMT)

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