By Min Zeng 

U.S. government bonds pulled back Wednesday as higher stocks and oil prices sapped demand for haven bonds.

Behind the boost for risk appetites: Eurozone finance ministers and the International Monetary Fund patched together a deal that clears the way for fresh loans for Greece. A gauge of business sentiment in Germany, the biggest economy in the eurozone, climbed in May.

These factors offset China's latest move to weaken its currency. The People's Bank of China set the reference rate of the yuan against the dollar at the lowest since 2011 amid a resurgent dollar this month.

"The risk on tone hurts demand for Treasurys," said Larry Milstein, head of government and agency trading at R.W. Pressprich in New York.

Possibility of a rate increase by the Federal Reserve this summer continued to weigh down the bond market. The yield on the two-year note, highly sensitive to the Fed's rate policy outlook, reached the highest level since mid-March. Yields rise as bond prices fall.

A $34 billion sale of five-year notes is due at 1 p.m. Wednesday, followed by a $28 billion sale of seven-year notes Thursday.

In recent trading, the yield on the benchmark 10-year Treasury note was 1.868%, according to Tradeweb, compared with 1.859% Tuesday.

The yield on the two-year note was 0.926%, compared with 0.909% Tuesday.

Selling pressure was partly kept in check as lower yields in Germany and Japan on Wednesday attracted buyers into U.S. debt. The U.S. bond market continues to benefit from investors' hunger for income in a low yield world.

U.S. bond yields have risen in May as the risk of an interest-rate increase by the Fed has been growing. A number of Fed officials over the past week warned that a rate increase in June isn't off the table.

Interest-rate futures -- a popular tool for hedge funds and money managers to place bets on the Fed's future policy moves -- showed Wednesday that the odds of an interest-rate increase at the Fed's June 14-15 policy meeting were 38%, according to CME Group. A month ago the probability was zero.

The odds for a rate increase at the Fed's December meeting were 82%, up from 46% a month ago.

Fed Chairwoman Janet Yellen will speak at Harvard University on Friday and on June 6 before the World Affairs Council of Philadelphia. The June speech will come three days after the May jobs report, and just over a week before the Fed's June policy meeting.

Higher yields may support demand for the five-year auction. A $26 billion sale of two-year note auction on Tuesday attracted the strongest overall demand since November.

Selling short-term debt and migrating to longer-term bonds has picked up momentum over the past few weeks as investors adjusted their portfolios to the risk of a near-term tightening act by the central bank.

As a result, the yield premium investors demand to hold the 10-year Treasury note relative to the two-year note has fallen. The premium at one point Tuesday hit 0.93 percentage point, the lowest level since late 2007.

In the bond world, a lower premium is known as a flattening yield curve. In the past it was widely interpreted by investors as a sign that the U.S. economy would be losing momentum because of the Fed's tightening policy.

Yet this time, money managers and analysts say the flattening curve is more a reflection of foreign investors' struggle to obtain income because of negative yields in Japan and Europe. As they buy long-term U.S. bonds that offer one of the most attractive yields in the developed world, it helps keep long-term U.S. bond yields near all-time lows, even as a robust labor market and some signs of uptick in inflation would have sent yields higher.

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

(END) Dow Jones Newswires

May 25, 2016 11:06 ET (15:06 GMT)