By Min Zeng 

The flight to safety trade in the U.S. government bond market, driven by Italian voters' rejection of constitutional reform, was short-lived, highlighting the bond market's vulnerability following one of the biggest selloffs since the financial crisis.

After falling to 2.34% during the Asian trading session, the yield on the benchmark 10-year Treasury note was recently at 2.443%, near a 17-month high. The yield was 2.39% Friday. Yields rise as bond prices fall.

The bond market's flip-flop followed the pattern after Donald Trump's victory from the U.S. presidential election a month ago. Traders said a "No" vote on Italy's referendum was partly priced in. Demand to hedge against such an outcome contributed to higher Treasury bond prices Friday.

"The vote was mainly as expected," said Christopher Sullivan, chief investment officer in New York at the United Nations Federal Credit Union.

Mr. Sullivan added that the result "provides support for further monetary easing" from the European Central Bank to contain the risk of any spillover effect in the eurozone's banking system.

The ECB is scheduled to meet later this week to set monetary policy. Many economists expect the ECB to extend its bond purchases beyond March 2017.

Adding to the bond market's selling pressure, a monthly indicator of U.S. service industry pointed to solid expansion and added to a brighter assessment toward the world's largest economy.

The latest comments from a top Federal Reserve official also pushed up bond yields. Federal Reserve Bank of New York President William Dudley signaled the central bank's intent to tighten monetary policy again Monday. Mr. Dudley said more interest-rate increases likely lie ahead for the U.S. central bank, adding that recent market moves to price in a more aggressive monetary policy path don't trouble him.

Investors widely expect the Fed to raise rates at its Dec 13-14 policy meeting. Fed-fund futures, a popular derivative market for hedge funds and money managers to place bets on the Fed's policy outlook, showed a 93% probability of a rate increase by the Fed's Dec. meeting, according to CME Group.

Government bond yields have been climbing after a big drop during the summer. Signs of improving global economic outlook and upticks in inflation sapped appetites for haven assets. Worries that major central banks are reaching limits in providing monetary stimulus also drove hedge funds and money managers to lighten up on bondholdings.

The bond market selloff had accelerated after the U.S. election in early November. Investors had bet that the prospect of expansive fiscal and economy policy from the new U.S. administration would lead to stronger growth, higher inflation and potentially a faster pace of interest rate increases by the Fed.

The yield on the 10-year Treasury note has surged more than 1 percentage point from its record close low set in early July. The yield was up 0.607 percentage points over the last four weeks, the most four-week increase since June 2009.

The big rise in yields had attracted some investors to buy over the past week as they deem the selloff as overdone.

"The optimism surrounding what the incoming administration will be able to deliver in terms of economic stimulus and reflation is at a peak and due for a moderation if not a reversal," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Some analysts advise investors to take advantage of any price recovery in the bond market to sell. Unlike the past selloff episodes that had sent out false alarm on higher yields, they warn that this time the bond market is vulnerable to higher yields.

The prospect of large fiscal stimulus also increase market expectation toward more government debt sales for funding. More debt supply amid shrinking demand for Treasury debt tends to push down bond prices and push up yields.

Steven Mnuchin, who was picked by President-elect Donald Trump as U.S. Treasury secretary, said last week that he will explore issuing debt maturing in more than 30 years.

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

(END) Dow Jones Newswires

December 05, 2016 10:49 ET (15:49 GMT)

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