By Min Zeng

The government-bond rout took a break Friday even as U.S. stocks closed at record highs.

After climbing above 2.4% earlier in the session, the yield on the benchmark 10-year Treasury note settled at 2.359%. While that was the highest close since July 2015, it was marginally higher compared with 2.355% Wednesday.

Yields rise as bond prices fall. The bond market was closed at 2 p.m. Friday after being shut Thursday for Thanksgiving.

Some investors deem the bond-market selloff since U.S. Election Day on Nov. 8 -- when the 10-year yield traded at 1.867%--as overdone. They believe the big rise in yields presents a buying opportunity. The yield has been up for more than half of a percentage point in November, headed for the biggest monthly increase since 2009.

Selling Treasury debt to buy stocks has been in vogue following Donald Trump's win. The allocation reflects growing market expectation that the prospect of large deficit spending, lower taxes and less onerous regulation advocated by Mr. Trump would boost U.S. economic growth, push up inflation and result in a faster pace of interest-rate increases by the Federal Reserve.

These factors tend to shrink the value of outstanding bonds. Inflation, in particular, chips away the fixed returns investors get from holding long-term bonds. A brighter growth outlook tends to boost investors' risk appetites and draw money away from relatively safer government debt and into stocks. Money has been flowing out of bond funds and into equity funds over the past two weeks.

Traders say higher yields are a boon for pension funds and insurance firms, which have been struggling to obtain income in a low-yield world. These institutional investors need high-grade, long-term fixed-income assets to match their long-term obligations.

"There is no question the pension funds have been starved for yield and the 3% yield level on the 30-year bond is attracting some attention which have had cash building in the hopes that higher yields would be forthcoming," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.

The 30-year bond was the best performer Friday, with its yield closing at 3.007%, down from a session high of 3.064%. It was 3.022% on Wednesday.

A $28 billion sale of seven-year Treasury notes on Wednesday drew the strongest overall demand since Feb 2014. The highlight was 72.7% indirect bidding, the highest on record, according to Jefferies LLC. The category is a proxy of demand from foreign investors including both private investors and foreign central banks.

Some caution that the yield still has room to rise.

While it remains to be seen how large the U.S. fiscal stimulus will be in the new year and its efficacy on the economy, data released in November pointed to a brighter growth outlook and added to the selling in the bond market.

Among the highlights: the best two-month stretch of retail sales in at least two years, the fastest pace of housing starts since 2007, wage growth last month rose at the fastest pace since 2009, and demand for long-lasting manufactured goods rose in October at the fastest pace in a year.

The taper tantrum episode serves as a warning for bondholders. The 10-year yield soared from around 1.6% at the start of May 2013 to 3% in early September, driven by fears over a cut in the Fed's bond-buying program. The yield pulled back to 2.5% in October but renewed its climbing into year-end, settling slightly above3% at the end of December 2013.

Scott Buchta, head of fixed-income strategy at Brean Capital LLC, said he wouldn't be surprised to see the 10-year yield rise to 2.50%-2.60%. Some say they wouldn't rule out that the yield could rise to 3% in coming months.

Investors had piled into bond funds after the financial crisis, as a prolonged period of soft growth, low inflation and ultraloose monetary policy had sent government-bond yields in the developed world to historically low levels earlier this year.

Some analysts say that if the flow out of bond funds and into stocks picks up momentum, it would send bond yields higher still.

The 10-year Treasury note's yield has surged from its record close low of 1.366% in July.

"I do believe we have ended the low rate cycle," said Kevin Giddis, head of fixed income capital markets at Raymond James.

Mr. Giddis cautions that "there is still a long way to go before any real changes are likely to occur" regarding the prospect of fiscal stimulus. He advises clients "not to abandon the bond market," but to reduce exposure to long-term Treasury debt as these bonds' prices have a sharper decline compared with short-term debt with a given rise in yields.

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

(END) Dow Jones Newswires

November 25, 2016 14:52 ET (19:52 GMT)

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