By Min Zeng 

U.S. government bonds strengthened on Monday following last week's price rally as the Federal Reserve soothed worries over a big rise in yields.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.484%, according to Tradeweb, compared with 2.5% Friday. Yields fall as bond prices rise.

The 10-year yield rose above 2.6% earlier this month and reached a two-year high as investors anticipated the Federal Reserve would raise short-term interest rates. The Fed did act last Wednesday, but its signal of a gradual path of tightening policy has eased worries over a swift rise, driving buyers back to the bond market.

Derivative markets suggest investors are expecting bond-market fluctuation to stay contained. The Bank of America-Merrill Lynch MOVE Index fell to 60.4397 on March 16, the lowest since October. The index tracks trading in derivatives on Treasury bonds and measures the size of expected government-bond price swings over a certain period.

Some traders expect the 10-year yield to trade between 2.4% and 2.6%.

"The bond market seems to be stuck here," said Anthony Cronin, a Treasury bond trader at Société Générale SA. "The next rate hike is at least a few months away still."

Fed-funds futures, used by hedge funds and money managers to bet on the Fed's policy outlook, priced in 54% that the Fed would raise rates again at its June meeting, according to CME Group. The odds were 58% last Friday.

A number of Fed officials are scheduled to speak this week, including Fed Chairwoman Janet Yellen on Thursday.

Some analysts caution that markets may be complacent to the risk of a more aggressive tightening path from the Fed, a case that would rattle the bond market and cause a sharp rise in yields.

Even as inflation data have pointed to upticks in consumer prices, the latest University of Michigan consumer sentiment survey Friday showed inflation expectations over the next five to 10 years hit a record low earlier this month. The survey bolstered demand for Treasury bonds Friday.

Inflation is the big threat to long-term government bonds. Higher consumer prices reduce the real purchasing power from bond investments.

Wagers on higher bond yields, or short bets, have pulled back lately. When investors dial back shorts, they return to the bond market as buyers, which helps send yields lower.

Hedge funds and money managers accumulated a net $89 billion worth of shorts for the week that ended March 14, a day before the Fed's rate decision, via Treasury futures, according to TD Securities. That was down from $93.9 billion a week earlier. The net shorts reached $100.7 billion in early January, the highest since 2008.

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

(END) Dow Jones Newswires

March 20, 2017 11:38 ET (15:38 GMT)

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