By Min Zeng

Prices of U.S. government bonds fell on Tuesday as investors took some chips off the table following a price rally in the prior session.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.463%, according to Tradeweb, compared with 2.401% Monday. Yields rise as bond prices fall.

Some investors had pared back risk appetite on Monday and flocked into Treasury debt on worries that U.S. President Donald Trump's protectionist approach on trade could hurt growth momentum.

On Tuesday, higher U.S. stocks and crude oil prices reflected improving risk appetite, reversing the haven flows in the bond market.

Treasury bond prices were also weighed down by new debt salesfrom both sides of the Atlantic.

A $26 billion sale of two-year Treasury notes occurred Tuesday afternoon, which will be followed by a $34 billion sale of five-year notes Wednesday and a $28 billion sale of seven-year notes Thursday.

The two-year note auction drew solid demand. The indirect bidding, a proxy of foreign demand, was 48.8%. That was the highest since May 2016.

U.S. government bonds continue to offer more appealing yields compared with their peers in Europe and Japan. The two-year notes were sold at a yield of 1.21%, much higher compared with a yield of negative 0.666% on the two-year German government bond.

Some European countries also issued new debt Tuesday, including the U.K. and Spain. In the U.S., corporate debt sales have been robust this month as firms lock in historically still cheap funding costs.

Bond underwriters and corporate bond issuers typically sell Treasury bonds to hedge unwanted volatility in interest rates before new debt sales are finalized, reflecting the U.S. government bond's role as a bedrock of global finance. Such selling pressure on the Treasury market, though, tends to be temporary. Once the new bonds are sold, underwriters and firms will unwind the hedges by buying back Treasury debt.

Treasury bond yields have pulled back from a recent peak after rising sharply since the U.S. Election Day. From 1.867% on Nov. 8, the 10-year yield had jumped to a two-year high of 2.6% on Dec 16. Since then, it has been retreating.

The setback of the reflation trade -- betting on stronger growth and higher inflation by selling Treasury debt -- reflects uncertainty regarding the details and efficacy of Mr. Trump's policies.

While the prospect of large fiscal spending and lower taxes is likely to boost growth, Mr. Trump's protectionist approach on trade could hurt the growth outlook, say investors and analysts. It could lead to retaliation from other countries and runs the risk of leading to trade frictions that damage both the U.S. and its trading partners, say some analysts.

Brian Edmonds, head of interest rates at Cantor Fitzgerald LP, said the crosscurrents are likely to keep the 10-year note's yield between 2.35% and 2.55% in the near term.

"It is going to be hard to break to new high yields" unless a new catalyst emerges, he said. One would be that the government bond market in Europe "starts to crack."

On Monday, Treasury bond yields fell after Mr. Trump signed an executive order to remove the U.S. from the Trans-Pacific Partnership, making the first step toward renegotiating new trade pacts with other countries.

Mr. Trump's policy details and their effect on the broader economy are also likely to influence the pace of interest rate increases by the Federal Reserve.

Market expectation of tightening monetary policy has been one factor sending bond yields higher. Fed Chairwoman Janet Yellen last week signaled that interest rates could be raised "a few times a year" through 2019. The Fed holds its first policy meeting of the year next week.

Lisa Hornby, U.S. fixed-income portfolio manager at asset-management firm Schroders, said the U.S. economy is likely to withstand the impact from two to three rate increases this year.

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

(END) Dow Jones Newswires

January 24, 2017 14:20 ET (19:20 GMT)

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