By Min Zeng

The first Treasury note auction in 2017 drew the strongest demand since August as the U.S. government bond market has been stabilizing from one of the biggest selloffs since the financial crisis.

Treasury bond prices held steady after the auction as two longer-term debt offerings loom. The yield on the benchmark 10-year Treasury note closed at 2.379%, compared with 2.377% Monday. Yields rise as bond prices fall.

The $24 billion new three-year notes were sold Tuesday afternoon at a yield of 1.472%, the highest yield for a three-year auction since 2010, which drew solid buying interest. One highlight was the 54.6% indirect bidding, a proxy of demand from foreign investors. The gauge was the highest since September as U.S. government bonds offer more attractive yields compared with their peers in Europe and Japan.

A $20 billion sale of 10-year notes is due on Wednesday followed by a $12 billion sale of 30-year bonds on Thursday.

The 10-year yield, a bedrock for global finance, has jumped from 1.867% on Nov. 8, the U.S. Election Day. After reaching a two-year high of 2.6% in mid-December, it has since been pulling back.

Selling Treasury bonds had been the main trade since the election as investors had bet that expansive fiscal stimulus proposed by President-elect Donald Trump will lead to stronger economic growth, higher inflation and a potentially faster pace of interest rate increases by the Federal Reserve.

All these factors tend to shrink the value of outstanding bonds. Inflation chips away bonds' fixed returns over time and is a big threat to long-term government bonds.

"The bond market is taking a breather and waiting for clarity about fiscal policy details," said Chirag Mirani, head of U.S. rates strategy at UBS. "One question regarding Mr. Trump is what chips he is going to lay on the table?"

Mr. Trump is scheduled to hold a press conference Wednesday before his inauguration next week.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said any focus on fiscal stimulus "would spur renewed reflation jitters," which would hurt the bond market.

The risk for investors betting against the bond market, he said, is that 2017 "will be the year to overpromise and underdeliver."

Some investors have stepped in to buy bonds at more attractive yields than a few months ago. They are concerned that Mr. Trump may fail to live up to market expectations.

Some have pared back wagers betting on higher yields. In doing so, they return to the bond market as buyers, sendingyields lower.

There are some signs that wagers on higher yields, known as short bets, are 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.

When many pare back shorts at the same time, it tends to magnify a slide in bond yields.

Traders say this factor drove a strong price rally in the bond market last Thursday, with 10-year yield down by 0.08 percentage point, the biggest one-day decline since June.

A gauge of sentiment on the Treasury market showed Tuesday that investors are being the least bearish on bond prices since late November. The share of investors expecting lower bond yields,or longs, rose to 16% for the week that ended Monday from 11% a week ago, according to J.P. Morgan Chase & Co.'s Treasury client survey.

The 10-year yield has risen by more than 1 percentage point from its low set in early July. The yield was still less than half of where it had traded in 2007.

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

(END) Dow Jones Newswires

January 10, 2017 15:54 ET (20:54 GMT)

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