TREASURIES-US yields climb for second straight session as oil surge continues

* Iran conflict sends oil prices higher

* Fed rate cut expectations drop as inflation concerns rise

By Chuck Mikolajczak

NEW YORK, March 3 (Reuters) - U.S. Treasury yields rose sharply for a second straight session on Tuesday, as the Iran war entered a fourth day to continue pushing oil prices higher and fuel inflation worries.

Explosions tore through Tehran and Beirut while Iranian drones slammed into the U.S. embassy in Saudi Arabia after previously hitting the mission in Kuwait, sparking concerns of an extended disruption to global energy supplies.

A day after President Donald Trump and Prime Minister Benjamin Netanyahu gave open-ended answers when asked how long the war would last, a source told Reuters that Israel's campaign had been planned to last two weeks and was moving faster than expected.

U.S. crude rose 8.04% to $76.96 a barrel and Brent rose to $83.60 per barrel, up 7.55% on the day, after hitting a 19-month high of $85.12. Crude had settled up more than 6% on Monday.

"People are settling in for a more protracted engagement and the market is saying well what does that mean because the only real knowable impact is on the energy markets and so positioning for that probably means extended inflation fears," said JP Powers, chief investment officer at RWA Wealth Partners in Boston.

"The inflation fears have won out here short term and we're probably looking at that resistance level around 4.3% on the 10-year here as the next kind of waypoint to decide which direction we're going to go from there."

The yield on the benchmark U.S. 10-year Treasury note was up 1.5 basis points at 4.067% after climbing to a 2-1/2 week high of 4.117% on the day. The rising inflation fears have dented expectations for a rate cut from the Federal Reserve. Markets were initially targeting the central bank's June meeting as the first with more than a 50% chance for a cut of at least 25 basis points, but the probability has now dropped to 39.1%, according to CME's FedWatch Tool.

The yield on the 30-year bond was up 1.1 basis points at 4.71% after rising to 4.746%, its highest since February 20. New York Federal Reserve President John Williams said the U.S. central bank is on track for more interest rate cuts if inflation pressures moderate as he expects, but he did not address the impact of the Iran conflict on the economy in prepared remarks.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 55.1 basis points after earlier dropping to 50.3, its narrowest since November 28.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 2.7 basis points to 3.514% after hitting 3.599%, its highest since late January.

Kansas City Federal Reserve President Jeffrey Schmid signaled his continued opposition to further interest-rate cuts, saying the U.S. labor market is in balance and inflation is too hot, although he also did not address the potential impact of the conflict in Iran.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.528% after closing at 2.499% on Monday, its highest since February 11.

The 10-year TIPS breakeven rate was last at 2.288%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci )