TREASURIES-US yields edge higher as Trump's Iran deadline looms

* US president's deadline raises oil prices, dampens Treasury safe-haven demand

* Fed's Williams says Middle East conflict may boost US inflation

* US capital goods orders rise in February

By Chuck Mikolajczak

NEW YORK, April 7 (Reuters) - U.S. Treasury yields advanced modestly on Tuesday as a deadline set by U.S. President Donald Trump for Iran to open the Strait of Hormuz drew closer with little sign an agreement could be reached.

Trump has given Iran until 8 p.m. EDT in Washington - 3:30 a.m. in Tehran - to end its blockade of Gulf oil, or the U.S. military will destroy every bridge and power plant in Iran. Iran says it would retaliate against U.S. allies in the Gulf, whose desert cities would be uninhabitable without power or water. Efforts to facilitate talks between the U.S. and Iran are ongoing, two Pakistani sources with knowledge of the discussions told Reuters on Tuesday. However, a senior Iranian source told Reuters that while Pakistan continues to convey messages to Iran, the U.S. has not changed its tone.

"That's the mother of all deadlines right there and everybody seems to be waiting for it," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group. "I don't think anybody really wanted to buy Treasuries with the chance that oil could go to $150 (a barrel) and that's the scary part of this whole thing. They should be buying Treasuries as a safe-haven bid, but for the most part, it's very tough to do with the chance that oil could accelerate."

The yield on the benchmark U.S. 10-year Treasury note rose 2.9 basis points to 4.364%.

FED OFFICIAL WARNS ABOUT INFLATION IMPACT New York Federal Reserve President John Williams said the energy shock resulting from the war will drive up overall inflation over the course of this year, while reiterating that monetary policy is in the right place to deal with what happens in the U.S. economy. U.S. crude rose 3.64% to $116.50 a barrel and Brent rose to $110.48 a barrel, up 0.65% as Trump's deadline approached.

The yield on the 30-year bond rose 4.4 basis points to 4.934% and was on pace for its biggest daily climb since March 27. On the economic front, new orders for key U.S.-manufactured capital goods increased more than expected in February while shipments of those products rose solidly, suggesting business spending on equipment was on firmer footing before start of the war with Iran.

MORE TREASURY SUPPLY COMING THIS WEEK

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 50.2 basis points.

Other Fed officials scheduled to speak on Tuesday include Chicago Fed Reserve President Austan Goolsbee and Fed Vice Chair Philip Jefferson.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 1 basis point to 3.86%.

More supply will come to the market this week when the Treasury auctions $58 billion in 3-year notes late on Tuesday, $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.643% after closing at 2.654% on Monday, its highest level since March 20.

The 10-year TIPS breakeven rate was last at 2.357%, indicating the market sees U.S. inflation averaging about 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Paul Simao)