By Min Zeng 
 

Selling pressure mounted again in the U.S. bond market after last week's price gain.

Higher stocks and an upbeat manufacturing sapped demand for relatively safer assets. In addition, St. Louis Federal Reserve President James Bullard said on Monday that an interest rate in December is most likely. Higher interest rates from the Fed tend to shrink the value of outstanding bonds.

The yield on the benchmark 10-year Treasury note settled at 1.763%, compared with 1.740% Friday. Yields rise as bond prices fall.

Looming new debt sales may weigh on the bond market. A $26 billion sale of two-year notes is scheduled on Tuesday, followed by $34 billion of five-year notes Wednesday and $28 billion sale of seven-year notes Thursday.

The flash purchasing manager's index (PMI) rose to 53.2 this month, up from 51.5 last month, according to Markit Economics' preliminary report.

Several Fed officials over the past week have signaled that the Fed's plan to raise interest rates this year is on track amid signs of steady growth. Federal Reserve Bank of New York President William Dudley said last week that he expects the central bank will be able to raise interest rates before year-end. Both Mr. Bullard and Mr. Dudley are voters this year on the Fed's interest rate policy.

Fed fund futures, a popular tool for investors and traders to bet on the Fed's interest rate policy, priced in a probability of 74% that the Fed would raise interest rates by its December meeting, according to data from CME Group. The odds were 69% on Friday.

"The market is giving the Fed the option of hiking in December and we expect the Fed to take it" barring any shock, said Mark Cabana, U.S. rates strategy at Bank of America Merrill Lynch.

The yield on the two-year Treasury note, highly sensitive to the Fed's policy outlook, rose to 0.840% late Monday from 0.827% Friday.

The two-year note's yield rose above 1% in December 2015 when the Fed raised short-term interest rates for the first time since 2006. Analysts say the yield has room to rise if the Fed raised interest rates in December.

John Canavan, market analyst at Stone and McCarthy Research Associates in Princeton, New Jersey, expects the Fed at its next week's policy meeting to send out a strong signal that a rate increase will come "sooner rather than later."

Mr. Canavan said a big risk for the bond market would be that the pace of the Fed's rate increases in 2017 may be faster than many investors anticipate.

The bond market had been under heavy selling pressure earlier this month, driven by the likelihood of an interest-rate increase by the Fed, less support from major central banks in Japan and Europe and signs of some uptick in inflation.

Selling pressure had tapered off last week. European Central Bank President Mario Draghi deflated concerns about a reduction, or tapering, of bond purchases. The U.S. consumer-price index rose at a smaller than forecast pace in September. These factors have attracted fresh buying interest into the bond market.

Among key factors to influence the direction of bond yields in the weeks ahead: the Fed's policy meeting and the nonfarm employment report for October are due next week, followed by the U.S. presidential election result a week after.

The 10-year yield has been rising from 1.605% traded at the end of September, but it remains lower compared with 2.273% traded at the end of 2015.

Some traders warn that the yield could rise to 2%, a level it last traded at in March, by the end of this year. Others say buying interest would grow if the yield rises closer to 2%.

Many investors don't expect a sharp rise in bond yields unless the global economy or inflation accelerate. Inflation chips away bonds' fixed returns over time and is the main threat to long-term government bonds.

 
   COUPON   ISSUE    PRICE     CHANGE     YIELD    CHANGE 
   3/4%    2-year   99 26/32   dn 1/32    0.840%   +1.7BP 
   3/4%    3-year   100        dn 1/32    0.995%   +1.4BP 
   1 1/8%  5-year   99 10/32   dn 4/32    1.271%   +2.7BP 
   1 3/8%  7-year   98 26/32   dn 5/32    1.554%   +2.4BP 
   1 1/2%  10-year  97 20/32   dn 7/32    1.763%   +2.5BP 
   2 1/4%  30-year  94 12/32   dn 17/32   2.516%   +2.7BP 

2-10-Yr Yield Spread: +92.3BPS vs +91.3BPS

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

(END) Dow Jones Newswires

October 24, 2016 15:45 ET (19:45 GMT)