By Min Zeng

The U.S. government bond rout deepened Friday, with the yield on the benchmark 10-year note closing at a 12-month high and logging the biggest two-week gain in 15 years.

The yield on the 10-year Treasury note settled at 2.337%, up from 2.278% Thursday. Yields rise as bond prices fall. It was up more than half of a percentage point over the past two weeks.

The selloff reverses a large price gain earlier this year that had sent the 10-year yield below 1.4% following the Brexit vote, a development that few investors had seen coming.

Bond yields started to rise from record lows set in July after global data pointed to improvement in the manufacturing sector, upticks in inflation and expectations over a policy shift toward fiscal stimulus with major central banks' monetary stimulus reaching their limits.

Selling has been intensifying after the U.S. presidential election on Nov 8. The prospect of large deficit spending, lower taxes and lighter banking regulation advocated by President-elect Donald Trump has been feeding a scramble to cut bondholdings.

Money managers are concerned that this policy outlook will lead to stronger U.S. economic growth, higher inflation and tighter monetary policy. This is causing investors to reassess the bond-market outlook, with debate growing over whether this marks a shift away from the long cycle of low yields in place since 1981.

Analysts caution that it is premature to draw a conclusion. Bond bears have signaled false alarms from higher yields in the past. Still, for investors and traders who subscribe to the view that bond yields are normalizing from rock-bottom levels, they are selling long-term Treasury debt to hedge against the risk of further increases in yields.

"We are entering into a new phase in the bond market," said David Coard, head of fixed-income trading at Williams Capital Group. "As a bond investor you need to get defensive because yields are likely to rise more from here. That means more pain for bondholders."

Mr. Coard is advising clients to cut holdings of long-term Treasury debt.

While yields remain very low from a historical standpoint, the sharp rise is inflicting pain on investors, especially those buying bonds at record low levels.

The Treasury bond market has posted a negative 2.32% return -- including bond price gains and interest payments -- this month through Thursday, according to data from Bloomberg Barclays U.S. Treasury index. It is on pace to be the biggest monthly negative return since December 2009. Forthe year, the index still logged a 1.5% return, but a further selloff in the bond market could wipe out the positive return.

Investors pulled a net $43.2 million out of U.S. mutual bond funds targeting the Treasury bond market for the week ended Wednesday, according to fund tracker Lipper. That was the biggest weekly outflow since a net redemption of $49.9 million in March 2015.

Analysts say the reason why bond yields have jumped so much is that, before the election, data had pointed to an improvement in global manufacturing and an uptick in inflation pressures. This week's solid retail sales, housing starts and labor market releases in the U.S. bolstered optimism over the resilience of the U.S. economy.

Some expect the 10-year yield could rise to 3% in 2017, a level last traded in early 2014.

Not everyone is subscribing to the view that the cycle of low yields is over. Some investors point to the uncertainty regarding Mr. Trump's policies, questioning how large the fiscal stimulus will be and how much of a boost it could give to the broader economy. In addition, they are concerned about Mr. Trump's protectionist stance on trade, which may hurt the U.S. growth outlook.

Analysts reckon the dark side of a sharp rise in yields if they pick up more traction from here. Treasury bond yields are benchmarks to set long-term borrowing costs for consumers and businesses. U.S. mortgage rates have been rising on the back of higher Treasury yields. Average rates on 30-year fixed conforming mortgages hit 4.125% Friday, the highest since July 2015, according to MortgageNewsDaily.com.

Higher Treasury yields also raise the borrowing costs for foreign governments and firms raising capital in U.S. markets. Furthermore, higher U.S. bond yields are boosting the appeal of the U.S. dollar, generating risk of capital flight out of developing countries and threatening to cause chaotic declines in emerging-market bonds and currencies.

The ICE dollar index, a measure of the U.S. currency's value against a number of its main peers including the euro and the yen, rose to the highest level since 2003 on Friday.

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

(END) Dow Jones Newswires

November 18, 2016 16:21 ET (21:21 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.