The 10-year U.S. Treasury yield rose to its highest level since 2011, extending a selloff in the world’s biggest bond market and raising fresh questions about how high America's borrowing costs will climb. The dollar reached the strongest point since December.

The global borrowing benchmark surpassed 3.0516%, the intraday peak from Jan. 2, 2014, and reached almost 3.06% on Tuesday in New York after a report showed retail sales rose in April. Bond traders are pricing in an even-more hawkish Federal Reserve, with the market-implied probability of three additional rate hikes this year now above 50%. That's more than central bankers themselves have projected.

On top of Fed tightening, Treasuries have come under siege from a flood of new issuance as the nation's budget deficits widen. And inflation expectations are hovering near the highest since 2014, after years of doubts about whether prices and wages would increase.

Treasury yield rises

"Bearish price action must be respected," BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote in a note Tuesday. "We've focused on technical factors as driving this selloff and as long as the price action paints a bearish picture for 10s, we'll stand aside and wait for the selling pressure to subside before taking a stab at any long positions."

The new high-water mark for the 10-year yield matters because few obvious levels of support exist that would impede a further selloff. Traders are now looking at the 3.2% area, which would match highs seen in mid-2011. The Bloomberg Barclays U.S. Treasury Index has lost about 2.2% in 2018.

Meanwhile, the greenback extended gains and was up against all of its major peers Tuesday, with emerging-market currencies the biggest laggards. The Bloomberg Dollar Index, which touched its highest level this year, climbed 0.8% and was on track for its biggest one-day gain since April 23.

The dollar's strength and higher yields follow from traders' willingness to price in a quicker pace of Fed rate increases. They’re now expecting about 2.5 additional quarter-point hikes in 2018, even more than the central bank's "dot plot" indicates, according to fed funds futures data compiled by Bloomberg.

Dallas Fed President Robert Kaplan, speaking Tuesday, said the central bank should lift rates gradually, and that when it comes to deciding on three or four hikes in 2018, he'd "rather make that judgment later in the year."

Bloomberg News