TREASURIES-US yields higher after inflation data as Iran talks in focus

(Updates to afternoon US trading)

* March CPI up 0.9%, matching forecasts; oil, tariffs drive prices

* Investors focus on US-Iran peace talks amid Middle East tensions

* Fed's Daly says policy restrictive, but oil shock delays return to 2% inflation target

By Chuck Mikolajczak

NEW YORK, April 10 (Reuters) - U.S. Treasury yields climbed on Friday after a reading on inflation showed a surge in prices in line with expectations, while investors looked toward possible weekend peace talks between the U.S. and Iran. The Labor Department said the Consumer Price Index (CPI) jumped 0.9% last month, the most in nearly four years, and 3.3% in the 12 months through March, in line with the estimates of economists polled by Reuters, as the Iran war caused a surge in oil prices and tariff pressures continued.

The market reaction was largely subdued, with yields initially moving slightly lower before reversing course and turning higher on the day as the jump in prices was largely anticipated.

"Hot headline with a calm core makes it a non-event," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"Any worries about March's inflation number are overshadowed by worries about the weekend and how talks go. That will determine the path of inflation forward."

The yield on the benchmark U.S. 10-year Treasury note rose 2.8 basis points to 4.321% and was down about 3 basis points on the week, putting it on track for a second straight weekly decline. Yields extended gains after the University of Michigan's Surveys of Consumers said its Consumer Sentiment Index tumbled to an all-time low of 47.6 this month from a final reading of 53.3 in March and also below the 52.0 estimate, with a surge in inflation in the next 12 months anticipated.

MIDDLE EAST CONFLICTS CLOUD OUTLOOK Iran said that its assets must be unblocked and a ceasefire take hold in Lebanon before peace talks with the United States can proceed, throwing last-minute doubt over negotiations scheduled for Saturday in Pakistan.

U.S. crude fell 0.18% to $97.69 a barrel and Brent rose to $96.12 per barrel, up 0.21%.

The yield on the 30-year bond gained 2 basis points to 4.918%. San Francisco Federal Reserve President Mary Daly said in an interview with Reuters that monetary policy is restrictive enough to put downward pressure on inflation without undercutting the labor market.

However, the oil shock from the war lengthens the timeline for inflation to return to the central bank's 2% target, she added.

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 51.3 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 2.3 basis points to 3.806% but was down 5 basis points on the week, poised for a second straight weekly decline. Markets are pricing in a 21.5% chance for a rate cut of at least 25 basis points at the Fed's December meeting, according to the CME's FedWatch Tool, down from the 27.3% in the prior session.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.621% after closing at 2.613% on Thursday.

The 10-year TIPS breakeven rate was last at 2.374%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak in New York; Editing by Jan Harvey and Matthew Lewis)