TREASURIES-US yields climb for third straight day as inflation risk gauged

* ISM nonmanufacturing index hits highest since July 2022

* ADP employment tops expectations

* Yields higher although crude prices ease

By Chuck Mikolajczak

NEW YORK, March 4 (Reuters) - U.S. Treasury yields advanced for a third straight session on Wednesday as investors gauged the likelihood of higher inflation and the path of monetary policy as the war in Iran puts upward pressure on oil prices. The U.S.-Iran war widened after a U.S. strike hit an Iranian warship off Sri Lanka, deepening a crisis that has paralyzed shipping through the Strait of Hormuz for a fifth day and choked off vital Middle East oil and gas flows. U.S. crude fell 0.86% to $73.92 a barrel and Brent declined to $80.77 per barrel, down 0.77% on the day after a report that Iranian operatives sought talks with the U.S. to end the conflict, but remained near levels not seen since June.

The yield on the benchmark U.S. 10-year Treasury note rose 2.9 basis points to 4.086% and was on pace for its first three-day streak of gains since mid-January.

"There's a lot of push-pull going on in the Treasury market right now," said Bill Northey, senior investment director at U.S. Bank Wealth Management, in Billings, Montana.

"We think about the impact of what's going on in the Middle East flowing through in two matters - one, creating a risk-off scenario which is creating a bit of buyer sentiment around the Treasury market as a safe-haven asset, but the opposite side of that really comes in the form of what are the implications to inflation from rising hydrocarbon costs, and then what does that mean for Fed policy."

Yields extended gains after the Institute for Supply Management (ISM) said its nonmanufacturing purchasing managers index increased to 56.1 last month, the highest reading since July 2022, from 53.8 in January and well above the 53.5 estimate of economists polled by Reuters.

In other data, the ADP national employment report showed private employment rose by 63,000 jobs last month, the largest gain since July 2025, after a downwardly revised 11,000 increase in January and topped the 50,000 forecast.

The yield on the 30-year bond gained 1.8 basis points to 4.721%. Expectations for a near-term cut by the Federal Reserve have been dented by the rise in oil prices, with the June meeting now showing a 37.1% chance for a cut of at least 25 basis points, according to CME's FedWatch Tool. The June meeting had been the first meeting markets were pricing in more than a 50% chance of a cut in recent weeks.

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 54.9 basis points. Fed officials have recently expressed views that it will take time to assess the impact of the conflict on monetary policy decisions, although Governor Stephen Miran said on Bloomberg TV on Wednesday that it has not changed the need for interest rate cuts.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 3.3 basis points to 3.533%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.506% after closing at 2.51% on Tuesday, its highest since February 9.

The 10-year TIPS breakeven rate was last at 2.279%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci )