TREASURIES-US bonds rise modestly as investors await Fed signals on Middle East risks

(Adds new comment, 20-year bond auction results, updates yields)

* FOMC statement ahead; market keen to hear remarks on Iran impact

* US rate futures price in one cut in 2026

* US 2/10 yield curve flattens for 2nd straight day

* US 20-year bond auction shows solid outcome

By Gertrude Chavez-Dreyfuss

NEW YORK, March 17 (Reuters) - U.S. Treasuries rose modestly in a relatively subdued Tuesday session, one day ahead of the Federal Reserve's pending decision on monetary policy, to be released following its two-day policy gathering which ends on Wednesday.

U.S. yields, which move inversely to prices, fell across the curve, with yields on five- to 30-year Treasuries down for a second straight session while two-year yields declined for a third day.

The Federal Open Market Committee is widely expected to leave its benchmark overnight rate unchanged in the 3.50% to 3.75% range, and investors are most keen to hear how officials assess the ongoing Iran conflict's implications for interest rates and the broader economy.

"Exactly how neutral will the Fed be tomorrow will be the main question," said Stan Shipley, fixed income strategist at Evercore ISI in New York.

Treasuries have sold off sharply since the U.S. and Israel attacked Iran in joint strikes at the end of February, sending yields higher on fears of rising inflation due to the spike in oil prices.

That selling pressure has abated, but yields are still elevated from late February, when the benchmark 10-year yield fell below 4%. On Tuesday, it dipped two basis points (bps) to 4.20%, following its largest daily decline since mid-February on Monday.

U.S. 30-year yields dipped 1 bp to 4.849%, after their biggest daily drop since February 12 on Monday.

U.S. two-year yields, which reflect interest rate expectations, were also down, slipping 1.4 bps to 3.669%. The yield has slid 9 bps over the last three days, the largest three-day fall since late November.

U.S. yields were in part tracking gains in equities, where risk sentiment improved after Israel reported the killing of Iran's top security official. However, that reaction was tempered by comments from a senior Iranian official who said the country's new supreme leader had rejected de-escalation offers, insisting Israel and the United States first be "brought to their knees."

Crude oil prices climbed Tuesday, with benchmark Brent crude settling at $103.42 on Tuesday, up more than 3%.

'DOT PLOT'

The Fed is expected to release its summary of economic projections and its interest-rate forecasts - known as the "dot plot" - on Wednesday. The "dots" from the December meeting, when the Fed last cut rates, suggested just one further 25-basis-point easing this year.

"The Fed is under absolutely no pressure to make any quick judgment calls on the path ahead for rates," wrote Matthew Ryan, head of market strategy at global financial services firm Ebury.

He noted that the United States is a net exporter of oil, "so not only is it less exposed to imported oil inflation, but the jump in global energy prices should provide a boost to America's terms of trade and real GDP growth."

U.S. rate futures on Tuesday priced in just one Fed rate reduction this year, or about 26 bps, down from 55 bps before the Iran war, according to LSEG estimates.

The U.S. yield curve flattened for a second straight session, with the spread between two-year and 10-year yields narrowing to 52.7 bps from 54.5 bps late on Monday, as investors added duration and pared front-end easing bets.

The move reflects a bull-flattening dynamic, where long-term interest rates fall faster than short-dated ones as traders increasingly see less scope for aggressive easing due to the jump in oil prices that has clouded the inflation outlook.

The Treasury sold $13 billion of 20-year bonds to solid demand in an auction at a yield of 4.817%, below prevailing market levels at the bidding deadline, indicating that investors were willing to absorb the supply without the Treasury having to offer additional yield.

The bid-to-cover ratio was 2.76, well above the 2.36 recorded at the previous auction in February and higher than the six-auction average of 2.63.

Post-auction, 20-year bond yields were down 1.8 bps, yielding 4.818%. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Rod Nickel and David Gaffen)