By Min Zeng

U.S. government bonds suffered the biggest one-day selloff in more than a month on Thursday as investors were spooked by the latest signal of interest rate increases from Federal Reserve Chairwoman Janet Yellen.

The yield on the benchmark 10-year Treasury note settled at 2.461%, compared with 2.391% Wednesday. It was the yield's biggest one-day gain since Dec 9.

Yields rise as bond prices fall.

In a speech late Wednesday, Ms. Yellen signaled interest rates could be raised "a few times a year" through 2019. While that is in line with the Fed's projection in December of three rate increases this year, traders say it highlights the risk that rates could rise more quickly. 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 two-year note, which is highly sensitive to the Fed's policy outlook, was 1.204%, compared with 1.172% Wednesday. The yield was 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. 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.

An improving economic backdrop bolsters the Fed's case. 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.

One popular trade has been to sell Treasurys and to buy Treasury inflation-protected securities. A $13 billion sale of 10-year TIPS drew strong demand on Thursday, the latest sign investors are flocking to assets that offer a shield against higher inflation. Indirect bidding, a proxy of foreign demand, soared to a record 77.1%.

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 72% 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.

"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.

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

(END) Dow Jones Newswires

January 19, 2017 16:11 ET (21:11 GMT)

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