TREASURIES-Yields higher on elevated energy prices as Iran war persists

(Updates throughout with latest market activity, adds market comments in paragraphs 7 & 8)

* Yields higher as Iran war persists

* 10-year yield last up to 4.403%

* Treasury to auction $69 billion in two-year notes

By Matt Tracy

WASHINGTON, March 24 (Reuters) - U.S. Treasury yields inched higher on Tuesday morning as optimism over a quick easing of the Middle East crisis faded, renewing concerns about inflation risks. The benchmark 10-year Treasury yield was last up 4.9 basis points at 4.403%, but short of a near eight-month high touched on Monday.

Two-year yields also edged higher and were last up 7 bps at 3.901%. They climbed to their highest since July in Monday trading. Yields dipped on Monday from their multi-month highs after U.S. President Donald Trump said he had delayed strikes on Iranian power plants and energy infrastructure, following what he called productive talks with Iran.

But Iran's foreign ministry responded shortly after that there was "no dialogue" between Tehran and Washington, according to state-affiliated media. Iran then announced fresh attacks on U.S. targets, lifting crude oil prices. Major brokerages have revised their 2026 average oil price forecasts as the war rages on and disruptions in shipments from the Strait of Hormuz persist, with Goldman Sachs (GS) raising its Brent crude oil forecast for 2026 to $85 a barrel from $77.

"You're seeing energy prices up today, which is driving a lot of the move back up in yields," said Jan Nevruzi, U.S. rates strategist at TD Securities. He added that five-year and seven-year Treasury notes had similarly edged higher on elevated energy prices.

Five-year yields were last up 6.5 bps to 4.015%, while seven-year yields were last up 6.4 bps at 4.207%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, viewed in the market as an indicator of economic expectations, was last at 47.64 basis points. U.S. rate futures on Friday began to price in the possibility of an interest-rate hike later this year after the Fed and other central banks last week kept rates on hold. Markets were pricing in a 91.7% chance of no hike for the Fed's April meeting as of Tuesday morning. Data on Tuesday showed U.S. manufacturing and services business activity fell to an 11-month low in March.

The U.S. Treasury is slated to auction $69 billion in two-year notes later in the day. (Reporting by Matt Tracy in Washington; Editing by Joe Bavier and Andrea Ricci )