By Sam Goldfarb 

U.S. government bonds strengthened Tuesday as investors continued to bet that inflation will remain soft as the Federal Reserve raises interest rates.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.361%, according to Tradeweb, compared with 2.370% Monday. Yields fall when bond prices rise.

Over the past month, the dominant theme in the Treasury market has been a shrinking gap between yields on short-term bonds and longer-term bonds, known on Wall Street as a flattening yield curve.

While the 10-year yield has barely moved, suggesting investors see little risk of rising inflation, the yield on the two-year note has climbed steadily higher, reflecting expectations that the Federal Reserve will keep raising interest-rates.

With the Thanksgiving holiday approaching, several traders said they didn't expect a major move in the Treasurys market this week, though light trading volumes could occasionally lead to small, sudden changes in yields.

As an example, the 10-year yield fell to 2.336% early in the U.S. trading session from 2.359% less than an hour earlier but then was quickly back up above 2.350%, according to Tradeweb.

"It seems like a lot of the [trading] desks have started to be very thinly staffed," said Aaron Kohli, interest-rate strategist at BMO Capital Markets.

"The real interesting thing," he added, "is what happens next week," when the Treasury Department will conduct three note-auctions over the two days, while the Senate could vote on a sweeping tax overhaul.

Many investors and analysts expect Treasury yields to rise if Congress passes a tax bill, in part because the legislation under consideration would add to the federal budget deficit. That would require the government to sell more bonds, weighing on the prices of outstanding debt.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

November 21, 2017 11:47 ET (16:47 GMT)

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