TREASURIES-Yields fall on Iran conflict before Fed statement

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Fed policymakers will update economic, rate projections

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Concerns about expanding Iran war boost demand for Treasuries

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Treasury to release foreign Treasury holdings on Wednesday

By Karen Brettell

June 18 (Reuters) - U.S. Treasury yields fell on Wednesday as concerns over the war in Iran boosted safe haven demand for the debt, before Federal Reserve policymakers on Wednesday are due to update their economic and interest rate projections. Iran's Supreme Leader Ayatollah Ali Khamenei said in a statement read by a television presenter on Wednesday that his country will not accept U.S. President Donald Trump's call for an unconditional surrender.

Some traders are concerned that the United States will join Israel's war against Iran.

Offsetting some of the safe haven demand for Treasuries are concerns that oil supply could be disrupted.

However, "oil prices have really stabilized after increasing because there's this cautious optimism that any Israeli strikes are not going to hit Iranian oil facilities," said Will Compernolle, macro strategist at FHN Financial in Chicago.

Compernolle noted it is difficult to read too much into Wednesday's market action due to traders repositioning ahead of the Fed later in the day.

The U.S. central bank is expected to hold rates steady as Fed officials waits to see the impact of the Trump administration's tariff policies on the economy. Updated economic projections are expected to show that Fed policymakers anticipate slower growth and higher inflation.

Policymakers in March projected 50 basis points in cuts this year and traders will focus on whether this estimate is raised or lowered.

The U.S. government will also release data later on Wednesday that shows changes in Treasuries holdings by foreigners in April.

Treasury yields surged after Trump on April 2 announced higher than expected tariffs, leading to concerns that foreign investors were moving away from U.S. assets.

"There was this narrative of the death of Treasuries from foreign demand and we haven't really seen it in the data," said Compernolle. "I will be curious to see if any countries specifically had a lot of outflows of Treasuries."

The yields stabilized in the weeks after the "Liberation Day" announcement as Trump delayed the implementation of the levies pending negotiations with trading partners. Yields pared some of their decline on Wednesday after data showed that the number of Americans filing new applications for unemployment benefits fell last week.

The yield on benchmark U.S. 10-year notes was last down 2.8 basis points on the day at 4.363%. The interest rate sensitive 2-year note yield fell 1.3 basis points to 3.937%.

The yield curve between two-year and 10-year notes flattened by around a basis point to 43 basis points.

The bond market will be closed on Thursday for the federal Juneteenth holiday.

(Reporting by Karen Brettell, Editing by Nick Zieminski)