TREASURIES-US bonds recover as markets digest Trump's speech, Iran's Strait of Hormuz news

(Recasts, adds new comment, NEW YORK dateline, byline, bullets; updates yields)

* Trump's unclear stance on Gulf war fuels inflation fears

* Iran, Oman drafting protocol on Hormuz Strait traffic

* Fed rate-cut expectations fade on worrying inflation data

* Focus shifts to US payrolls report for March

By Gertrude Chavez-Dreyfuss and Wayne Cole

NEW YORK/SYDNEY, April 2 (Reuters) - U.S. Treasuries clawed back losses to trade higher on Thursday, as investors weighed comments from President Donald Trump that seemed to dim hopes of an early end to the war in the Middle East while news that Iran could be laying the groundwork to reopen the vital Strait of Hormuz tempered some risk aversion.

Trump's much anticipated address to the nation late on Wednesday offered little clarity on when the U.S. conflict with Iran might wind down and, crucially, waved off any responsibility for reopening the strait. Roughly 20% of global oil supplies - about 20 million barrels per day - passes through the waterway. It's also a major route for the transport of liquefied natural gas, especially from Qatar.

The speech drove oil prices sharply higher and heightened fears that inflation would rule out easier monetary policy.

"Trump's comments drove the moves in all assets because there's really no clear plan presented on the timeline on the war and how the administration is going to wrap it up," said Jan Nevruzi, U.S. rates strategist at TD Securities. "So inflation has become a focus again." Treasury yields, which rise when prices fall, started to drift lower in the New York session, as buyers stepped in upon seeing better entry levels.

The slide in yields was extended on a report that Iran is drafting a protocol with Oman to monitor traffic in the Strait of Hormuz, which analysts said could pave the way for its reopening.

In midday trading, benchmark 10-year yields were down 2.8 basis points to 4.295%, falling after an earlier rise triggered by Trump's speech. For the week, 10-year yields have fallen about 14 bps, on pace for their largest drop since the week of February 23.

MORE AGGRESSIVE ACTION Trump on Wednesday vowed more aggressive strikes on Iran and also suggested the war could escalate if leaders in Tehran did not give in to U.S. terms during negotiations, with strikes on Iranian energy and oil infrastructure possible.

That threat caused a jump in Brent and U.S. crude futures, which were last up 5.2% at $106.54 per barrel and 9% at $109.19, respectively. The surge in oil also saw the market price out Federal Reserve interest rate cuts for this year, compared to the 50 basis points of cuts expected before the war began on February 28.

On the shorter end of the curve, the two-year yield , which reflects interest rate expectations, was slightly down at 3.794%. The near closure of the strait has snarled global supply chains for a host of products, including gasoline, natural gas, jet fuel, fertilizer, chemicals, aluminum, pharmaceuticals and cement. The inflationary wave is already being felt, with average cost of gasoline topping $4 a gallon in some U.S. states and the wider effect still to be felt. A closely watched survey of manufacturingon Wednesday showed its measure of prices paid had shot up 19 points in just two months to levels typically consistent with a 4% annual inflation rate. The jump in inflation will make it harder for the Fed to countenance a rate cut even as rising energy costs act as a tax on consumers and a drag on domestic demand. Much now depends on the release on Friday of the U.S. employment report for March. The consensus forecast of economists polled by Reuters is for a gain of 60,000 jobs last month. The country shed 92,000 jobs in February. "A rebound in job creation will likely see market pricing shift materially in favor of a Fed hike, or two, as has been the case elsewhere across the developed world," analysts at Westpac wrote in a note.

In other pockets of the bond market, the yield curve flattened, with the gap between two-year and 10-year yields narrowing to 50.5 bps, compared to 51.2 bps late on Wednesday.

The curve showed a bull-flattening scenario as a result of long-term yields falling faster than those on the short end. This situation is largely a reflection of the news about a potential reopening of the Strait of Hormuz. (Reporting by Wayne Cole in Sydney and Gertrude Chavez-Dreyfuss in New York; Editing by Mrigank Dhaniwala and Paul Simao)