By Sam Goldfarb

A rally in U.S. government bonds picked up momentum Thursday as investors moved out of trades that have been popular since the November election.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.361%, according to Tradeweb, compared with 2.452% Wednesday.

Yields fall as bond prices rise.

The sharp increase in bond prices came as stocks and the U.S. dollar weakened, suggesting investors were becoming less confident in their conviction that economic growth and inflation are poised to pick up strength due in part to more expansive fiscal policies under a Donald Trump administration.

Minutes fromthe Federal Reserve's December meeting, released Wednesday, presented a mixed picture of the economy. However, investors and analysts appeared to focus on the more negative aspects of the discussion, including uncertainty over the impact of Mr. Trump's fiscal policies and concern that the strengthening dollar could make it harder for inflation to reach the Fed's 2% target.

After reaching record lows over the summer, bond yields rose sharply toward the end of last year, reflecting better economic data, signs of rising inflation and expectations that Mr. Trump and a Republican-controlled Congress will increase the budget deficit by cutting taxes and increasing spending on defense and infrastructure.

A more expansive fiscal policy could diminish the value of outstanding government debt by adding to the supply of bonds. It could also spur growth and inflation, which would erode the fixed returns of bonds and possibly lead the Federal Reserve to quicken its pace of interest-rate increases.

Not all investors, though, are convinced that the postelection bond selloff was completely justified, noting the economy still faces long-term challenges that may be difficult to overcome with a change in fiscal policy, which itself is uncertain.

After rising steadily for weeks, bond yields began to decline in the final weeks of December, a move that now seems more than just an anomalous result of light-holiday trading.

"You're seeing a lot of assets that had done well last year being sold," said Aaron Kohli, interest-rate strategist at BMO Capital Markets. "If people are recalibrating their original expectations for what Trump and the new Congress can deliver to something a little more realistic that should translate into slightly lower yields."

Further unsettling traders Thursday was a new wave of liquidity tightening by China's central bank, which sent the yuan to its highest level against the dollar since mid-November in offshore markets. Investors also reacted to a soft report on private payrolls, which created some pessimism ahead of Friday's more significant employment report from the Labor Department.

Inflation expectations also declined along with natural gas prices after new data showed a smaller-than-expected decline in natural-gas inventories.

The Fed raised short-term interest rates in December for the second time in a decade and projected three rate increases this year. Its next meeting is scheduled for Jan. 31 and Feb. 1.

Interest-rate-derivative markets show investors expect the Fed to raise rates twice this year, beginning at the end of spring.

Fed funds futures, a popular derivative market for investors and traders to place bets on the Fed's rate-policy outlook, showed Thursday a 64% probability of the Fed raising interest rates by its June meeting, according to CME Group. The odds of the Fed raising rates at least three times, or three quarters of a percentage point, by December were 34%.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

January 05, 2017 13:30 ET (18:30 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.