By Min Zeng

The yield on the two-year Treasury note closed above 1% on Tuesday for the first time in 10 months, as fresh signs of robust consumer spending boosted market expectations for a Federal Reserve interest rate increase next month.

The yield on the two-year note closed at 1.008%, up from 0.988% on Monday. Yields rise as bond prices fall. Yields on short-term debt are highly sensitive to the Fed's policy outlook.

The yield on the benchmark 10-year Treasury note closed at 2.240%, compared with 2.224% Monday. It was the highest close level since Jan 5.

The winner on Tuesday was the 30-year bond, with its yield falling to 2.972% from 2.983%. Traders said long-term bonds benefited from investors migrating cash out of short-term debt, a popular allocation strategy to prepare for the Fed's tightening monetary policy.

Retail sales rose 0.8% in October from the prior month, following 1% gain in September, the Commerce Department said on Tuesday. Those gains marked the best two-month stretch of sales in at least two years, boosting sentiment about the U.S. growth outlook.

Federal Reserve Bank of Boston President Eric Rosengren on Tuesday said a December interest-rate increase looks pretty likely at this point. Fed-funds futures, a popular derivative market for hedge funds and money managers to place bets on the U.S. interest rate policy outlook, suggested a 91% probability of a rate increase by the Fed's December meeting, according to data from CME Group. The odds were 86% Monday and 81% late last week.

Selling pressure in the bond market was moderate on Tuesday, a tentative sign that the bond market rout that had intensified since last week's U.S. presidential election may be subsiding.

Before Tuesday's session, the 10-year note's yield had been up by more than 0.4 percentage point, marking the biggest five-day rise since 2009. The yield was 1.867% on the election day. It hit 2.3% during Monday's session but has since pulled back from that level.

"It is time to start buying at these yield levels," said Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co. He said the 10-year yield trading close to 2.25% is a buying opportunity.

Like many others, Mr. Milstein expects more price swings in the bond market, given the uncertain outlook over Mr. Trump's policy and its efficacy. "We won't know the answer until we really see what sort of infrastructure spending package and reduction in tax rates are proposed, " he said.

Others say the bond market is vulnerable for a further increase in yields.

Bond yields in the developed world have been rising after a big drop this summer. The selling pressure had accelerated after Donald Trump's surprise win to become the next U.S. president. Investors have been shedding bond holdings as speculation has been growing that his expansionary fiscal policy may lead to stronger growth and higher inflation.

A brighter growth outlook makes government bonds, typically a haven to preserve capital, less appealing to hold. Inflation chips away bonds' fixed returns over time and is a big threat to long-term government bonds.

"In the short term, it's hard to see yields falling back," said John Stopford, head of multi-asset income at Investec Asset Management, which had $115 billion assets under management at the end of October. "If these fiscal policies are implemented and they fail to boost growth, then we could see a retracement in the longer term. For the moment, the market is giving it the benefit of the doubt."

A bond-market sentiment gauge closely followed by global investors was the most bearish on bond prices in 10 months.

The share of investors expecting higher bond prices fell to 11% for the week ending Monday from 14% a week ago, according to the latest weekly Treasury clients survey from J.P. Morgan Chase & Co. released on Tuesday. The share of those expecting lower bond prices rose to 23% from 16%. The resulting negative 12% difference reflects the most negative sentiment on the bond market since Jan 25.

Global data over the past month have pointed to improvement in manufacturing and an uptick in inflation pressure from China, the U.K. and the U.S. A gauge of wage inflation in the U.S. rose at the fastest pace last month since 2009.

Analysts say one risk for the bond market is that the Fed may quicken its pace of tightening in 2017, which would put more selling pressure on Treasury bonds.

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

(END) Dow Jones Newswires

November 15, 2016 16:06 ET (21:06 GMT)

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