By Min Zeng 

The U.S. bond market rebounded from earlier losses on Tuesday as concerns over France's presidential election boosted demand for haven assets.

A $26 billion sale of two-year notes Tuesday afternoon drew the strongest overall demand since August. A proxy of demand from foreign investors rose to the highest since May, underscoring the appeal of U.S. government debt amid geopolitical risks.

The yield on the benchmark 10-year Treasury note was 2.424% recently, according to Tradeweb, compared with 2.425% Friday. Yields fall as bond prices rise. The U.S. bond market was closed Monday for the Presidents Day holiday.

The yield had risen to 2.461% earlier in the session. IHS Markit on Tuesday said its composite Purchasing Managers Index for eurozone manufacturers and service providers reached its highest level since April 2011. The data pointed to an improved growth outlook in the region.

Buyers stepped in as the latest poll showed Marine Le Pen extended her lead for the first round of France's presidential race set for April. Ms. Le Pen, a far right leader, has threatened to pull France out of the eurozone currency bloc.

Investors have been selling government bonds in France in recent weeks and migrating cash into safer bonds such as German bunds and U.S. Treasury debt. On Tuesday, the yield premium investors demanded to hold the two-year French government bond relative to the two-year German debt was the highest since 2012.

"The French elections are becoming an increasing concern as we see from increasing French government yields," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. "This uncertainty is likely restraining U.S. yields to a degree."

Tuesday's swing in the U.S. bond market points to crosscurrents that have held the 10-year Treasury yield between 2.3% and 2.6% since mid-December even as U.S. stocks have set a string of record highs and deepened a rally since the U.S. election. On Tuesday, the Dow Jones Industrial Average and the S&P 500 hit records.

Higher stock prices reflect brighter sentiment toward the U.S. growth and corporate earnings outlook amid the prospect of expansive fiscal policy from the Trump administration. Yet analysts say the bond market suggests some caution from investors regarding President Donald Trump's proposals for lower taxes and large infrastructure investments.

"The bond market is showing a little bit of skepticism on the growth and inflation story," said Jeff Given, portfolio manager with Manulife Asset Management.

Reflecting the crosscurrents, hedge funds accumulated a net $22 billion worth of bets on lower prices for 10-year Treasury futures for the week ended Feb. 14, according to TD Securities. Meanwhile, asset managers raised bets on the opposite -- higher prices for 10-year Treasury futures. The net value of their wagers was $24 billion for the week ended Feb. 7, according to TD Securities.

John Stopford, co-head of multiasset at Investec Asset Management, said political risk is clouding the growth outlook in the eurozone, which bolsters the case for the European Central Bank to continue to buy government bonds and keep short-term interest rate at ultralow levels.

The release of minutes from the Jan. 31-Feb. 1 meeting of the Federal Reserve's policy-making committee is due Wednesday afternoon. Investors will zero in on clues about the timing for the next interest-rate increase.

Over the past week, a number of officials including Fed Chairwoman Janet Yellen have signaled that a rate increase could come as soon as next month. Federal Reserve Bank of Philadelphia President Patrick Harker said he wouldn't "take March off the table" in an interview Friday with Market News International.

The yield on the two-year note, highly sensitive to the Fed's policy outlook, was 1.211% Tuesday. It was near its Dec. 15 settlement of 1.261%, which was the highest close since August 2009.

Fed-funds futures, used by investors to wager on the Fed's interest-rate policy outlook, showed Tuesday 22% odds for the Fed to raise rates by its March 14-15 meeting, according to data from the CME Group. The odds were around 13% a week ago.

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

(END) Dow Jones Newswires

February 21, 2017 14:12 ET (19:12 GMT)