Long-dated Treasury yields fell on Thursday, even as short-dated yields rose, after a key reading of inflation came in less than expected, potentially clouding the outlook for the Federal Reserve’s monetary policy path.

The Fed is still expected to lift interest rates next month, which would be the second hike of the year, but the tepid inflation data could raise questions about expectations for further rate increases in 2018.

How are Treasurys performing?

The 10-year Treasury note yield TMUBMUSD10Y, -1.13%^[1] slipped by 3.3 basis points to 2.971%, after touching an intraday high of 3.014% on Wednesday, while the 2-year note yield TMUBMUSD02Y, -0.48%^[2] the most sensitive to shifting expectations on monetary policy, rose 0.8 basis point to 2.538%, keeping it at a decadelong high.

The 30-year bond yield TMUBMUSD30Y, -1.72%^[3] fell 3.5 basis points to 3.120%, according to WSJ Market Data Group.

Meanwhile, the yield for the 5-year Treasury note TMUBMUSD05Y, -0.54%^[4]  edged down 0.5 basis point to 2.833%, according to Tradeweb data.

The gap between the 5-year and 30-year Treasury notes narrowed to 28.7 basis points, its flattest since July 2007. Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.

Bond prices move in the opposite direction of yields.

What’s driving the bond market?

Consumer-price inflation data for April rose 0.2%^[5], below the forecast of a 0.3% increase from economists polled by MarketWatch. Its core gauge, stripping out volatile food and energy prices, rose 0.1%, keeping its yearly increase at 2.1%

That stoked a rally in longer-dated bonds, causing the yield curve to flatten, only a day after the market appeared to express sensitivity to signs that prices and inflation may be gathering steam^[6] as U.S. crude-oil prices CLM8, +0.37%^[7] extended a climb to their highest levels since 2014 amid rising Middle East tensions ^[8]on the back of President Donald Trump’s decision to withdraw the U.S. from a multilateral nuclear pact with Iran, raising fears that inflation may be...