By Min Zeng

The U.S. government bond market sold off Thursday as investors were spooked by the latest signal of interest rate increases from Federal Reserve Chairwoman Janet Yellen.

In a speech late Wednesday, Ms. Yellen signaled interest rates could be raised "a few times a year" through 2019. She said that December's rate increase, the second time since 2006, reflects officials' confidence toward the U.S. economic outlook, which supports the central bank's tightening campaign. A policy favoring higher interest rates tends to shrink the value of outstanding bonds.

"The Fed chair threw some cold water" on the bond market, said Kevin Giddis, head of fixed-income capital markets at Raymond James.

The yield on the benchmark 10-year Treasury note was 2.479%, according to Tradeweb, compared with 2.391% Wednesday. Yields rise as bond prices fall.

The yield on the two-year note, which is highly sensitive to the Fed's policy outlook, was 1.246%, compared with 1.172% Wednesday. The yield is near its highest level since 2009.

The bond market had recovered some ground over the past month following a big selloff since the U.S. election, reflecting some caution toward the details of President-elect Donald Trump's fiscal and economic policies. The 10-year yield reached a two-year high of 2.6% in mid-December, compared with 1.867% on Election Day, as investors had bet that Mr. Trump's policies would lead to stronger growth and higher inflation, factors that deflate the value of Treasury debt.

Mr. Trump's inauguration will take place on Friday.

Ms. Yellen's comments, meanwhile, have shifted investors' focus back toward the pace of the Fed's interest-rate increases, driving fresh selling pressure in the bond market. The Fed chairwoman is scheduled to speak again late Thursday.

An improving economic backdrop bolsters the Fed's case as there have been signs that the labor market is approaching full employment, while some inflation readings have reached the Fed's 2% target.

On Thursday, the latest jobless claims report pointed to a robust labor market, an 11.3% rise in housing starts brightened the housing market outlook, and the reading of the latest manufacturing survey released by the Federal Reserve Bank of Philadelphia indicated that activity across the mid-Atlantic continued to expand.

Furthermore, data released Wednesday showed the consumer-price index increased 2.1% in December from a year earlier, the largest year-over-year rise since June 2014.

The Fed has projected three interest-rate increases during 2017. But interest rate futures markets suggested that many had been hesitant to wager on rates being raised three times this year. The Fed forecast four rate increases for 2016 at their December 2015 meeting, but ended up only raising rates once.

Traders said Ms. Yellen's comments raised the specter of a more aggressive Fed.

Reflecting the sentiment, fed-funds futures, a popular derivative market for investors to place bets on the Fed's rate policy, showed Thursday a 74% probability for the Fed to raise rates at least by a quarter of a percentage point by its June 2017 meeting, according to CME Group. The odds were 67% on Wednesday.

The odds for the Fed raising rates by its December 2017 meeting were 94%.

"Negative momentum has crept back" into the bond market, said Anthony Cronin, a Treasury bond trader at Société Générale SA. "The Fed has been fairly hawkish so far this year but it took the market to hear it from the Fed chair before it really noticed."

The Fed's tightening plan is likely to be affected by the details of Mr. Trump's policies. Should fiscal stimulus lead to an acceleration in U.S. economic growth, the Fed is likely to tighten more aggressively than many investors currently expect, a threat to the bond market, say analysts.

Bond yields could sink if Mr. Trump's policy disappoints and fails to generate stronger growth, since then the Fed may be more cautious in raising rates, they say.

Negative wagers on the bond market had continued to pile up over the past weeks even as the 10-year yield has pulled back from its recent peak, a sign many see the slide in yields as short-lived.

Hedge funds and money managers held a net $100.7 billion in Treasury futures contracts, betting on a rise in U.S. bond yields for the week that ended Jan. 10, according to data from TD Securities. It was the highest amount 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 Election Day.

The risk is that these bets may sour. When a lot of people pare back shorts at the same time, it tends to magnify a slide in bond yields.

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

(END) Dow Jones Newswires

January 19, 2017 11:19 ET (16:19 GMT)

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