(Bloomberg) -- Global bonds are slumping after two shock interest-rate hikes this week served traders a reality check that central banks are far from done fighting inflation. 

Shorter-maturity Treasury yields are close to their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with more rate hikes to combat stubbornly fast consumer-price gains. 

The tightening is convincing traders to rethink their bets of Federal Reserve rate cuts later this year, underscoring the threat that the battle against inflation may be far from over. 

“Bond markets face stiff headwinds from multiple directions,” said Markus Allenspach, head of fixed income research at Julius Baer. “We have to admit that the disinflation process is slower than we had hoped for.”

Fresh jitters over a prolonged rate hike cycle risk paving the way for a renewed surge in volatility across global risk assets. But just like during last year’s hikes, the concerns also put traditional havens in the firing line — a gauge of US Treasuries fell more than 1% in May as funds repositioned.

The latest developments “run against the prevailing narrative that central banks are on the verge of pausing their rate hikes, particularly given Canada was one of the first to formally signal a pause back in January,” Deutsche Bank AG strategists including Jim Reid wrote in a note. “The big question now is whether the Fed might follow up with a hike of their own next Wednesday, or whether they’ll finally keep rates on hold after 10 consecutive increases.”

Global Yields Climb as Traders Lean Toward Fed Hike by July

Treasury yields were little changed around 10 a.m. London time on Thursday, with the 10-year around 3.80%, up about 10 basis points this week. Australia’s three-year yield jumped as much as 18 basis points to 3.88%, the highest since 2011.

More Hikes

Investors briefly priced in a full quarter-point rate hike by the Fed by July and though they still expect some easing by year-end, multiple rate cuts have being priced out of markets. That’s triggered a renewed flattening of sections of the US yield curve.

All eyes will be on US inflation data next week, which will provide further clues on the Fed’s policy path. 

“With inflation having proved more stubborn than we’d thought, we now think the central bank will keep its policy rate higher for longer than we had previously projected,” Diana Iovanel, economist at Capital Economics, wrote in a note. 

While some firms including Societe Generale SA reckon US interest rates may already be at their peak, the same can’t be said for those in Europe. Traders are pricing in half a percentage point of hikes by the European Central Bank in the next three months, swaps data show.

The ECB is “behind the curve in terms of inflation pressure, in terms of rates,” Guy Stear, head of fixed income research at SocGen told Bloomberg Television. “They have to keep going.” 

--With assistance from Alice Gledhill.

(Updates prices, adds investor comment in fourth paragraph.)

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