By Min Zeng

The Trump trade is retreating in the U.S. government bond market.

The yield on the benchmark 10-year Treasury note closed at 2.358%, the lowest since Dec 7, compared with 2.368% Wednesday. Yields fall as bond prices rise.

The note's yield has jumped from 1.867%, where it settled on the U.S. Election Day. But after reaching a two-year high of 2.6% on Dec. 16, the yield has since been sliding.

Investors have wagered that the prospect of large fiscal spending, lower taxes and lighter regulations proposed by U.S. President-elect Donald Trump will lead to stronger economic growth, accelerating 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 rout has stalled over the past few weeks, reflecting some concerns that policy details may fail to live up to market expectations.

Mr. Trump, during his first press conference Wednesday since being elected, provided little fresh information on the fiscal outlook. Traders said this drove further paring of short bets in the bond market Thursday. In doing so, investors come back to buy bonds, boosting bond prices.

"I call it 'the honeymoon is over' trade," said Russ Certo, managing director of rates trading at Brean Capital LLC. The market is "disappointed about the lack of crystallized policy prescriptions" from Mr. Trump's press conference.

This week's Treasury debt auctions drew decent demand as the bond market stabilizes from the recent selloff.

A $12 billion sale of 30-year bonds Thursday drew 66.7% indirect bidding. A proxy of foreign demand, it was the largest since July.

A day earlier, the indirect bidding for the $20 billion sale of 10-year notes reached the highest since August.

U.S. government bonds continue to offer more attractive yields compared with their peers in Europe and Japan.

Some other markets also point to a pullback of the Trump trade.

The ICE dollar index fell to a one-month low Thursday after hitting the highest level since 2002 earlier this month. Gold has been rebounding after selling off after the election. Government bond yields in some other developed markets such as Germany and the U.K. have also pulled back from their recent highs.

Lopsided positioning has been whipsawing global markets in recent years. 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 which use superfast computers and automated algorithm strategies to place bets when a trend or momentum develops in markets.

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.

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 from record lows.

The 10-year Treasury yield was less than half of where it had traded in 2007. It has been climbing from its record low of 1.366% set in early July.

Jim Paulsen, chief investment strategist at Wells Capital Management, said bond yields and stock prices could rise significantly more than most appreciate.

"Throughout this [economic] recovery, bond yields have been kept artificially below free market levels" due to central banks' large bond-buying programs, Mr. Paulsen said.

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

(END) Dow Jones Newswires

January 12, 2017 16:14 ET (21:14 GMT)

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