By Min Zeng 

U.S. government bonds pulled back on Monday after the biggest weekly price gains in more than a month.

Looming new Treasury debt supply generated mild selling pressure. A $26 billion sale of two-year Treasury notes is due Tuesday, followed by $34 billion of five-year notes Wednesday and $28 billion sale of seven-year notes Thursday.

Corporate bond supply is expected to pick up speed ahead of the Memorial Day holiday, another factor hurting Treasury prices, said analysts. Firms and banks that underwrite new corporate debt typically sell Treasurys to hedge against unwanted interest-rate swings, reflecting the Treasury bond market's role as a bedrock for global finance.

The yield on the benchmark 10-year Treasury note settled at 2.254%, compared with 2.243% Friday. Yields rise as bond prices fall.

The yield dropped by 0.9 percentage point last week, driven by political jitters out of D.C. that deflated investors' optimism toward a rollout of large fiscal stimulus this year.

U.S. stocks have been strengthening after last Wednesday's big selloff, a sign political anxiety has dialed back. Analysts say this gives the Fed some breathing room to raise short-term interest rates next month after a rise in March.

"The Fed can stick to its plan of raising rates two more times this year as long as financial conditions don't tighten dramatically," said Kathy Jones, chief fixed-income strategist at Schwab Center for Financial Research.

Ms. Jones said the Fed would reassess its tightening outlook if "political turmoil" gets to a point where it starts to affect the U.S. growth outlook.

The Fed's minutes for its meeting on May 2 and 3 is due Wednesday afternoon. Investors will zero in on clues about the pace of interest-rate increases as well as discussions about how to wind down the Fed's large balance sheet, which includes more than $2 trillion of Treasury debt holdings.

The cost of one-month U.S. dollar loans between banks reached its highest level in more than eight years on Monday, a sign of strong expectations that the Fed would act next month. The one-month London interbank offered rate was 1.03% Monday, according to ICE Benchmark Administration, the unit of Intercontinental Exchange that oversees Libor. That is its highest point since Dec. 15, 2008, when the rate reached 0.96%.

Fed-funds futures, used by investors to bet on the Fed's policy outlook, showed a 79% chance that the Fed would raise short-term interest rates by its June 13-14 meeting, according to CME Group. The likelihood was put at 74% Friday and 51% a month ago.

Higher interest rates from the Fed tend to dilute the value of outstanding bonds, yet the 10-year Treasury note yield remains near the lowest of the year.

Analysts say the bond market is showing some skepticism about the Fed's likelihood to raise rates further in the second half of the year, driven partly by waning confidence toward President Donald Trump's ability to push through large fiscal stimulus.

"Sentiment has certainly extended further against the possibility that we'll see anything meaningful from Congress in terms of tax reforms and pro-business initiatives, in an intuitive response to the investigation into involvement between the Trump campaign and Russian officials," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Despite the roaring stock markets this year, Treasury bond yields have fallen after a big rise during late 2016. The 10-year yield traded at 2.446% at the end of 2016. In mid-March, it traded above 2.6%.

Net bets by hedge funds and money managers wagering on higher prices or lower yields via the 10-year Treasury futures hit $24 billion for the week that ended May 16, according to TD Securities. That was the highest since December 2007.

At the end of February, net bets wagering on higher yields had soared above $40 billion. The reversal indicates many investors have either exited or pared the sell-Treasurys trade, which was the consensus trade leading into this year.

--Katy Burne contributed to this article.

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

(END) Dow Jones Newswires

May 22, 2017 16:03 ET (20:03 GMT)