TREASURIES -US front-end yields rise as markets pare back Fed easing outlook

* Fed rate-cut view trimmed as global central banks turn cautious

* BoE, ECB decisions highlight inflation risks from Middle East conflict

* US yield curve flattens as short-term rates rise faster

* US $19 billion 10-year TIPS auction comes in weaker than expected

By Gertrude Chavez-Dreyfuss

NEW YORK, March 19 (Reuters) - U.S. Treasury yields rose at the front end of the curve on Thursday, with two-year yields touching a seven-month high, although markets regained some of their footing as they digested cautious rate decisions by key central banks against the backdrop of war in Iran.

Analysts said the rise in Treasury yields accelerated after the Bank of England's Monetary Policy Committee voted unanimously to keep borrowing costs unchanged, citing inflation risks linked to the conflict. Some policymakers even raised the prospect of further rate increases.

The European Central Bank also held its key rate steady and warned that the Iran war clouded the outlook for growth and inflation in the euro zone.

The BoE and ECB decisions "reminded Treasury investors that, as much as the Fed was signaling patience yesterday ... central banks could prioritize inflation over everything else in this supply-shock scenario," said Will Compernolle, macro strategist at FHN Financial in Chicago.

The U.S. two-year yield US2YT=RR, which typically responds to changes in expectations for inflation and interest rates, hit 3.96%, its highest since August, and was last up 3.9 bps at 3.782%. The five-year yield US5YT=RR also climbed to a seven-month peak and was last up 1.6 bps at 3.876%.

The benchmark 10-year yield US10YT=RR hit its highest since late August as well, and was last flat at 4.257%.

The earlier surge in yields came after investors priced out expectations for Federal Reserve rate cuts this year, according to LSEG estimates. U.S. rate futures on Thursday pointed to just 7 basis points of Fed easing this year, down from 21 bps of rate reduction late Wednesday. There was also no rate cut priced for the first half of 2027.

The Fed, in a forecast on Wednesday that followed its two-day meeting, penciled in a rate cut of 25 bps later this year and another in 2027.

RATE CUT IN 2026?

"The Fed is going to have to respond to greater labor market weakness and inflation concerns so the reaction at the very front end of the curve makes sense," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

But he believes the Fed may need to cut rates at some point in 2026.

"When you look further out, I think that we have a weakening consumer - to the extent that they have to manage more of the dwindling discretionary income ... since high gasoline prices leave less ability to spend elsewhere," Griffiths said.

Fed Chair Jerome Powell said on Wednesday that the environment was subject to unusually high uncertainty as policymakers take stock of the impact of the war. The Fed held rates steady in the 3.50%-3.75% range and projected higher inflation and steady unemployment.

Attacks on Iran's South Pars gas field - along with the world's largest gas plant in Qatar and on oil refineries in both Saudi Arabia and Kuwait - sent Brent prices shooting to $115 a barrel. They were last up 1.1% at $108.53.

U.S. crude futures were last down 0.4% at $95.94 per barrel .

INFLATION SWAPS

Inflation swaps, a market gauge of the outlook for future consumer prices, spiked to a six-month peak of roughly 3.3% in one-year maturities. This suggested that investors believe the consumer price index (CPI) will average more than 3% over the next 12 months. That view contrasted with the latest CPI reading of 2.4% year-on-year in February.

Those elevated inflation expectations were echoed in Thursday's $19 billion auction of 10-year Treasury Inflation Protected Securities (TIPS), which came in weaker than expected but with otherwise solid demand metrics. The auction cleared at 1.896%, slightly above market forecasts, suggesting that investors required a premium to absorb the supply.

But the bid-to-cover ratio, another gauge of demand, was 2.47X, higher than both the level in the last auction in January and the average for the last six auctions.

In other parts of the bond market, the U.S. yield curve flattened for a fourth consecutive session, with the spread between two-year and 10-year yields narrowing to 36.4 bps from 48.6 bps late on Wednesday. It was last at 43.8 bps.

The curve showed a bear-flattening pattern, with short-term interest rates rising faster than longer-dated ones, reflecting a rethink of the Fed's easing path. Rising oil prices have rekindled inflation worries, leading traders to scale back expectations for swift or deep rate cuts.

Earlier in the session, U.S. data pointed to labor market resilience and improving manufacturing activity in the U.S. Northeast. The reports overall supported the view that the Fed can afford to be patient before restarting its rate-cutting cycle, but they had little impact on the Treasuries market.