The Treasury yield curve flattened on Tuesday, with higher-than-expected CPI in June, prompting traders to bet that the Fed will tighten monetary policy in early 2023.

The gap between five-year and 30-year Treasury yields narrowed to less than 115 basis points, nearing the lowest level of 2021 hit last month.

The yield on the five-year note rose to about 0.82 per cent, more than 20 basis points higher than it was in mid-February, while the 30-year yield fell. Money market traders expect the Fed to start raising interest rates in early 2023.

At one point, expectations of inflationary pressures in the bond market were boosted by the biggest increase in CPI in June since 2008. The indicator that reflects market expectations for the average annual inflation rate over the next decade-the 10-year break-even rate-rose as high as 2.37 per cent, but is still below the eight-year high hit in May. The index fell back from its highs after policymakers last month advanced their median forecast for the first rate hike to 2023.

BlackRock"A very important part of the CPI report is that we will certainly see some inflationary pressures brought about by the restart of the economy, but there are also pressures on the service sector," Kate Moore, director of thematic strategy, told Bloomberg Television.

Long-term bond yields fell about 2 basis points to 1.97%. The response to the data is consistent with recent Wall Street forecasters' view that years of steepening of the yield curve is over.