Treasury bond investors, who forecast lower interest rates two weeks ago, now see no chance the Federal Reserve will reduce borrowing costs until late next year as policy makers continue to warn about the threat of inflation.

Interest-rate futures show traders expect the Fed to keep its target for overnight loans between banks at 5.25%. Fed funds futures traded on the Chicago Board of Trade projected 20% odds of a cut two weeks ago.Last month, the contracts suggested a 50% chance for lower rates. Treasuries posted their biggest weekly decline in four months after Fed Chairman Ben S. Bernanke and other policy makers suggested they are unlikely to cut borrowing costs.

Yields on 10-year notes, which had declined to seven-month lows on speculation the housing slump would cool the economy, jumped the most since June after reports showed rising consumer confidence and retail sales.

“The bond market was anticipating a bigger slowdown,” a manager of $22 billion in Pittsburgh at Federated Investors Inc., Joe Balestrino, said. “Bernanke and company have clearly sent a message that the market has misinterpreted what they think.”

Yields on 4 7/8% Treasury notes due in August 2016 climbed 11 basis points, or 0.11 percentage point, last week to 4.80%. The price, which moves inversely to the yield, fell about 3/4, or $7.50 per $1,000 face amount to 100 18/32.

The decline reduced gains from the third-quarter rally that sent 10-year yields to a seven-month low of 4.53% on September 25. Bonds returned 3.64% in the quarter, the biggest advance since 2002. Now, that’s down to 2.9%.

Yields on 2-year notes exceeded those on 10-year securities by as much as 11 basis points on September 26, a sign that the Fed would soon cut rates and inflation wasn’t a threat. Investors typically demand higher yields on longer-term debt because of the risk that inflation will erode the fixed payments over time.

The rally ended after the government said October 6 that the economy created 50% more jobs than initially estimated. On October 11, the Fed released minutes from its September 20 meeting that showed policy makers saw a “substantial risk” price pressures may not ease.

Losses accelerated October 13 when the Commerce Department reported retail sales excluding gasoline increased 0.8% in September, the most since January. The same day, the University of Michigan’s consumer sentiment index jumped to 92.3 from 85.4 in September, the highest since July 2005.