(Bloomberg) -- Amid a slide in global bonds, the Treasury market briefly restored the full pricing of Federal Reserve tightening by July, which they expect to be the last interest-rate hike in 2023.

The latest shift in expectations for Fed policy came amid a surge in Treasury yields across the curve. Selling picked up after the Bank of Canada cited stubborn inflation pressures for delivering a quarter-point hike Wednesday and extended into Asia markets Thursday, where short-dated Australian yields hit their highest in more than a decade. 

The rate on swap contracts linked to the Fed’s July gathering climbed to a peak of 5.33% on Wednesday, or 25 basis points above the current effective fed funds rate of 5.08%, before easing back late in New York. The June swap showed about seven basis points of tightening ahead of next week’s Fed meeting, suggesting that traders are leaning in favor of a tightening pause.

The December swap remained around 25 basis points below the July contract, implying one quarter-point easing by the end of the year. 

Renewed volatility around the pricing of Fed policy expectations looms ahead of next week’s US consumer price index, set to be released on the first day of the Fed meeting. Both the headline and core measure for the past year are expected to decline, but remain well above the Fed’s 2% target, according to economists surveyed by Bloomberg.

“Coming into next week, all eyes will certainly be on the CPI data,” Marilyn Watson, head of the global fundamental fixed-income strategy team at BlackRock Inc., told Bloomberg Television Wednesday. “Inflation is still far above the Fed’s target. So they may choose to pause, skip, or however you want to phrase it. It’s certainly not a done deal there won’t be more hikes to come.”

The Bank of Canada followed Reserve Bank of Australia this week with a quarter-point hike. Australian bonds continued to sell off Thursday with three-year yields climbing to their highest since 2012.

Australia’s Crashing Yield Curve Doubts RBA Hope of No Recession

“Monetary policy elsewhere illustrates both the economic peril of a premature pause and the potential for resurgent inflation to provoke ‘surprise’ rate hikes,” Citigroup Inc. economists said in a note. “A Fed pause risks a similar experience in the US” and “once it becomes clear policy rates are not sufficiently restrictive, central banks (including the Fed) may react by hiking sooner rather than later.”

Their base case points to another quarter-point hike by the Fed next week.

Trading in the yield curve was active as the 30-year Treasury lagged the selling pressure in the five-year, sparking a renewed inversion of the curve. The five-year yield at one stage was back to trading nearly three basis points above the long bond, the deepest inversion since March 22, before trimming that move late in New York.

That segment of the Treasury curve steepened to a peak in early May as the market anticipated rate cuts later this year, with the subsequent flattening reflecting firmer jobs data and sticky inflation pressure and the pricing out of easing.

--With assistance from Matthew Burgess.

(Updates pricing and adds Australia bond move.)

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