(Bloomberg) -- Treasuries and other government bonds slumped as investors, who are bracing for another record-size auction of US debt, digested inflation data that stands to forestall central bank interest-rate cuts in some parts of the world.

The selloff pushed yields higher around the world on Wednesday — led by those in Australia and Europe, where traders are reassessing the path ahead for domestic monetary policy. The yield on 30-year Treasuries climbed to within a a basis point of its the highest level of the year as investors look ahead to a $70 billion sale of five-year notes at 1 p.m. New York time, the most ever offered for the tenor. 

“There is a bit of concern that inflation might be ticking up in the short-term and is stickier than people thought,” said John Fath, managing partner at BTG Pactual Asset Management US LLC. At the same time, “I don’t think the supply issue is helping. There is an issue with the sheer volume of these auctions, both here and in Europe.”

A hot reading of Australian inflation data earlier in the day bolstered the case for local policymakers to hold interest rates at a 12-year high. It’s the latest piece of evidence for investors who are betting that certain major central banks will ultimately keep rates higher for longer than previously anticipated.

Read More: European Bonds Falter as Central Bankers Temper Rate-Cut Bets

Focus now shifts ahead to the Treasury’s auction of five-year notes. On Tuesday, the US sold a record $69 billion of two-year notes at a yield of 4.898%, lower than where the rate was trading before the auction, a strong sign of buoyant demand. 

This week’s hefty slate of supply — the last of the current funding cycle — will help determine whether this is a turning point for the market, which has weathered four straight weeks of losses. The rout briefly drove the two-year yield past the 5% mark, a level that could entice bond managers seeking to put money to work in short-dated maturities. 

For weeks, traders have been scaling back how many rate cuts they expect from the Federal Reserve and abandoning bullish wagers. The driver has been a string of resilient economic data and evidence that inflation will remain high for longer, compounding the threat of the government’s outsized borrowing needs.

But “demand for US Treasuries is rock solid,” said Elias Haddad senior markets strategist at Brown Brothers Harriman, “indicating no immediate concerns over US fiscal profligacy.” 

Padhraic Garvey, head of global debt and rates strategy at ING Financial Markets, and Tony Farren, managing director in rates sales and trading at Mischler Financial Group both described Tuesday’s results as “impressive.”

Wednesday’s five-year auction carries extra importance as the tenor has been sought by investors looking to increase duration after concentrating their bets on the shorter end of the curve, which is the most sensitive to changes in monetary policy expectations. 

Swaps traders are fully pricing in just one quarter-point rate cut from the Fed for all of 2024, compared with more than six at the start of the year.

Bank of America Corp’s strategists including Mark Cabana earlier this month recommended going long five-year Treasuries, saying the tenor “captures the Fed cutting trough and is not as exposed to elevated supply concerns” compared to longer tenors. 

Treasuries fell ahead of Wednesday’s auction, with the five-year rate rising four basis points to 4.67%. The two-year rate climbed to 4.94%, a loss of value since the auction.  

Vincent Mortier, chief investment officer at Amundi SA, has also been gradually increasing duration with three- to five-year Treasuries. He would consider buying the 10-year if it hits the 5% mark. 

“If we go to this kind of level, then for us it’ll be a strong buy signal,” he said. “It’s possible on the back of hot inflation data or hot GDP data in the US.”  

--With assistance from Sydney Maki and Sujata Rao.

(Updates throughout with global bond moves.)

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