By Min Zeng

Prices of government bonds in the U.S., Germany and the U.K. strengthened Monday after British Prime Minister Theresa May signaled that the U.K. would make a definitive break with the European Union.

Mrs. Theresa, in an interview with Sky News on Sunday, reiterated her intention to prioritize control of immigration over access to the bloc's single market in upcoming Brexit negotiations. The stance raises concerns over the potential impact on the economic growth from the Brexit, pushing the British pound to the lowest level since October against the U.S. dollar.

"The speech on a hard Brexit has the market in a flight-to-quality trade, " said Tom diGaloma, managing director of Treasury trading at Seaport Global.

Lower crude oil prices also boost demand for Treasury bonds as they reduce inflation anxiety. Inflation chips away bonds' fixes returns over time and is a big threat to long-term government bonds.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.376%, compared with 2.417% Friday. Yields fall as bond prices rise.

The yield on the 10-year German bund fell to 0.279% and the yield on the 10-year U.K. gilt dropped to 1.340, according to Tradeweb.

Looming new debt supply is likely to keep a lid on bond price gains. A $24 billion sale of three-year Treasury notes is due Tuesday, followed by a $20 billion sale of 10-year notes Wednesday and a $12 billion sale of 30-year bonds Thursday.

Government bond yields in the developed world have posted a big increase since the U.S. election. The prospect of expansive fiscal spending, lower taxes and lighter regulations proposed by President-elect Donald Trump have fueled market expectation over stronger growth and higher inflation, driving investors to sell government bonds and embracing stocks.

The bond market has been stabilizing over the past few weeks. Trader say the big rise in yields have reflected investors' optimism over the fiscal outlook and now investors await details from Mr. Trump. Should policy details fail to meet expectation, say analysts, wagers betting on higher yields, known as short bets, may be pared back.

The 10-year yield has risen from 1.867% settled on the election day. But it has pulled back after closing at 2.6% on Dec 16, the highest since September 2014.

There is sign that betting against the bond market is getting stretched.

Hedge funds and money managers held a net $94.3 billion in Treasury futures contracts betting on a rise in U.S. bond yields for the week that ended Jan 3, according to data from TD Securities.

It was the highest since 2008 when the bank started to track the weekly data. The amount has soared from $42.2 billion for the week that ended on the U.S. election day.

By dialing back these wagers, investors return to the bond market to be a buyer. When many cut positions at the same time, it tends to generate a sharp decline in bond yields.

Bond yields remain very low from a historical standpoint. The 10-year yield was less than half of where it traded in 2007.

Many big banks on Wall Street expect bond yields to rise this year, lifted by the prospect of better growth and higher inflation, as well as the Federal Reserve's plan to raise interest rates further.

The Fed's tightening policy has been one of the factors sending Treasury-bond yields climbing since the U.S. election. Higher interest rates from the Fed tend to shrink the value of outstanding bonds.

The Fed last monthraised short-term interest rates for the second time in a decade. Officials projected three rate increases this year.

Interest rate strategists at Goldman Sachs Group Inc said last week that they expect the 10-year Treasury yield to rise to 3% at the end of this year, a revision from the 2.75% predicted late last year.

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

(END) Dow Jones Newswires

January 09, 2017 10:47 ET (15:47 GMT)

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