By Min Zeng

The U.S. government bond market suffered the biggest one-day selloff in more than a month, following a price rally in the prior session, as investors' risk appetite improved.

The yield on the benchmark 10-year Treasury note settled at 2.471%, compared with 2.401% Monday. It was the yield's biggest one-day increase since December 9. 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, haven flows in the bond market reversed as U.S. stocks strengthened, with the Dow Jones Industrial Average near 20,000, a milestone it has never crossed.

Treasury bond prices were also weighed down by new debt sales from both sides of the Atlantic. A $26 billion sale of two-year Treasury notes occurred Tuesday afternoon, to be followed by a $34 billion sale of five-year notes Wednesday and a $28 billion sale of seven-year notes Thursday.

The latest price swing underscores the bond market's sensitivity to Mr. Trump's policy outlook as investors are caught between the prospect of large fiscal stimulus, which had been the key driver sending yields higher since Election Day, and the risk of trade frictions.

From 1.867% on Nov. 8, the 10-year yield had jumped to a two-year high of 2.6% on December 16. Since then, it has been retreating, reflecting uncertainty regarding the details and efficacy of Mr. Trump's policies.

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."

The share of investors expecting higher bond yields rose to 25% for the week that ended Monday from 20% a week ago, according to J.P. Morgan Chase & Co.'s weekly Treasury client survey. The share of those expecting lower bond yields was steady at 16%.

The two-year note auction Tuesday 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 than the 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 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 completed, 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.

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 yearnext 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 16:42 ET (21:42 GMT)

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