(Bloomberg) -- Most US Treasury yields climbed to new year-to-date highs, with the two-year note’s approaching 5%, after strong retail sales data further eroded investor confidence that the Federal Reserve will start cutting interest rates this year.

The benchmark 10-year note’s yield rose as much as 14 basis points to 4.66%, the highest level since mid-November, after March retail sales rose more than economists estimated and February’s increases were revised higher. 

Expectations for monetary policy have been shifting toward a later start to Fed rate cuts, which officials have said requires a higher degree of assurance that inflation is on a sustainable path back toward their 2% target. Traders are no longer fully pricing in a rate cut before November, while at the start of the year, cuts beginning in March were priced in.

“If we keep getting numbers like today’s retail sales, the Fed may not be in a position to cut rates,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. 

Chen said the 10-year yield’s break above 4.5% recently is “significant,” setting up a move toward 4.75% as the top of a new trading range.

The US 10-year rate began the year below 4%, and expectations were widespread that levels higher than 4.5% would attract buyers, limiting further increases. That was briefly the case on Friday, when the prospect of escalation in Middle East conflict created demand for haven assets including Treasuries.

Haven demand ebbed in the wake of the latest hostilities between Israel and Iran, however, sending US crude oil futures back below $85 a barrel and five- to 30-year Treasury yields to new year-to-date highs. The rise in yields means losses for investors bought bonds at lower yield levels.  

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The two-year, which briefly exceeded 5% on April 11 — just before the release of benign wholesale inflation data sparked a rally to lower yield levels — rose only as high as 4.993%. It peaked last year in October at 5.257%, the highest level since 2006, as traders held the view that the Fed might keep interest rates elevated indefinitely.

“It’s tricky for investors to really assign probabilities of geopolitical risks and trade effectively,” said Subadra Rajappa, head of US interest rates strategy at Societe Generale. “The general trade in an environment where growth is strong is to fade the geopolitical risk premium.”

Rajappa sees limited room for two-year yields rise much above 5%. Such a move would require the Fed to keep the benchmark borrowing costs at 5.25% and 5.5% for the next 18 months, or even resume tightening — a remote probability in her view. 

Rising Treasury yields can be viewed as the sum of expectations that Fed policy will remain restrictive for longer than previously believed, and higher inflation expectations.

Yields on the subset of Treasuries that pay interest on inflation-adjusted principal — so called real yields — also rose to year-to-date highs, with the 10-year topping 2.2% for the first time since November. 

The difference between the real and nominal yield, representing the inflation rate that would equalize them, widened to 2.43%, last seen in October. 

The March retail sales data was the latest in a spate of indicators that show resilience in the US economy and sticky inflation. It leaves bond traders hungry for clear and conclusive proof that Fed interest-rate cuts are imminent before making any more big bullish wagers.

Treasury options flow in the aftermath of the retail sales data included bearish protection targeting higher yields, with one anticipating a 4.65% 10-year yield for a premium of over $4 million.

New York Fed President John Williams said on Monday the central bank remains likely to start lowering interest rates this year if inflation continues to gradually come down. He also said, though, that monetary policy is in a good place, and pointed to the enduring strength of consumers and the broader economy.

With US elections looming later this year, the Fed has the “calendar is working against them,” Tom Porcelli, chief US economist at PGIM Fixed Income, said on Bloomberg Television. 

“If they don’t go in September or November, if they don’t go in July — that leads all the way to December,” he said. “At best, the Fed gets one in this year, maybe two.”

--With assistance from Alexandra Harris and Edward Bolingbroke.

(Updates prices; adds comments and detail from fourth paragraph.)

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