By Min Zeng

Prices of government bonds on both sides of the Atlantic strengthened Monday as demand for haven assets sent the yield on the benchmark 10-year U.S. Treasury note to near a one-month low.

The yield on the benchmark 10-year Treasury note settled at 2.377%, compared with 2.417% Friday. Yields fall as bond prices rise.

One boost for bonds came from remarks by British Prime Minister Theresa May, who 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 British control of immigration, over access to thebloc's single market, in coming Brexit negotiations.

The stance raises concerns over the potential impact on economic growth, pushing the pound to the lowest level since October against the U.S. dollar. Meanwhile, government bonds in Europe gained ground. The yield on the 10-year German bund fell to 0.28% and the yield on the 10-year U.K. gilt dropped to 1.338%, according to Tradeweb. Gold, another haven asset, also rose.

"The comments reinforced the complexity of the upcoming Brexit negotiations," said James DeMasi, chief fixed-income strategist at Stifel Nicolaus & Co. "Global flight to quality flows could suppress U.S. interest rates, even if our domestic growth and inflation rates show moderate improvement in 2017."

A 3.8% decline in U.S. crude oil prices added to demand for Treasury bonds as they reduce inflation anxiety. Inflation chips away at bonds' fixed returns over time and is a big threat to long-term government bonds.

Looming new debt sales kept a lid on the Treasury bond market's strength. 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 sank to record lows after the U.K.'s referendum in late June to leave the European Union. Yields have climbed over the past months as sentiment brightened on the prospect of expansive fiscal spending, lower taxes and lighter regulations proposed by U.S. President-elect Donald Trump. Investors bet that this policy outlook will lead to stronger growth and higher inflation.

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 expectations, say analysts, wagers betting on higher yields, known as short bets, may be pared back.

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

Hedge funds and money managers held a net $94.3 billion in Treasury futures contracts that bet on a rise in U.S. bond yields for the week ended January 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 election day.

Lopsided positioning has been whipping global markets over the past years. Since the financial crisis, ultraloose monetary stimulus from major central banks have fueled large price gains in stocks, bonds and commodities, and caused investors to crowd into trades. Over the past few months, investors had piled into wagers on higher stocks, lower bond prices and a stronger dollar, betting on pro-growth fiscal policy in the U.S.

The risk for investors is that a selloff or rally in one market easily ripples into others. This is compounded by hedge funds that use superfast computers and automated algorithm strategies to place bets when a trend or momentum develops in markets.

"Markets can be materially impacted by crowded sentiment and positions across asset class," said Russ Certo, managing director of rates trading at Brean Capital LLC.

Last Thursday is a case in point. Wagers on stronger dollars were pared back as the Chinese yuan rallied, which drove investors to cut their bets on higher stocks, higher Treasury bond yields and weaker gold prices.

The 10-year yield sank by 0.08 percentage point that day, the biggest on a one-day basis since June 2016. The WSJ Dollar index, which measures the U.S. currency's value against a number of its peers globally, fell by 1% Thursday, the biggestone-day selloff since September 2016.

Some investors say any pullback in bond yields won't last for long as they see higher yields as part of the process for the bond market to normalize after record lows. The 10-year Treasury yield Monday was less than half of where it traded in 2007.

"We've had eight years of near-zero short-term interest rates, and a lot of investors [had flocked into long-term bonds] to capture yield." said Donald Ellenberger, portfolio manager at Federated Investors. "The sharp upward move in yields since November occurred very quickly, and I'm skeptical that eight years of investors moving further and further out the curve to pick up yield can be unwound in such a short period of time."

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

(END) Dow Jones Newswires

January 09, 2017 15:55 ET (20:55 GMT)

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