TREASURIES-US yields rise as crude prices reverse course

(Updates to afternoon New York trading)

* Yields climb as oil rebounds after WSJ report

* Fed officials say inflation risks may delay rate cuts

* Initial jobless claims rise, but below expectations

By Chuck Mikolajczak

NEW YORK, May 7 (Reuters) - U.S. Treasury yields advanced in choppy trading on Thursday, reversing earlier declines, as oil prices turned positive after a report said Iran would not allow the U.S. to reopen the Strait of Hormuz with an "unrealistic plan." Yields moved higher along with oil prices after the Wall Street Journal reported that a senior Iranian official said the country would not permit the U.S. to reopen the Strait of Hormuz and exit the war without paying any reparations. In normal times, about a fifth of the world's oil and liquefied natural gas passes through the Strait of Hormuz.

U.S. crude rose 0.02% to $95.10 a barrel after hitting a session high of $97.46 after the report, and Brent was at $100.65 per barrel, off 0.61%, a day after climbing to $102.49.

Yields were lower earlier in the day, tracking a sharp decline in crude prices, as the United States and Iran considered a limited and temporary agreement to halt their war, sources and officials said, with Iran reviewing a proposal that would stop the fighting but leave the most contentious issues unresolved.

The yield on the benchmark U.S. 10-year Treasury note rose 3.2 basis points to 4.386% after dropping to 4.314% on the day, its lowest since April 27.

"The bond market's been remarkably quiet throughout this process, and in fact has not sold off as much as you would have expected, given the reduction in expected cuts, so therefore, it's just going to grind lower rather than just rip lower if we get a resolution," said Jay Hatfield, chief executive and chief investment officer at Infrastructure Capital Advisors in New York.

"It just makes sense that we're on hold waiting for the resolution of this proposal to Iran because it's really kind of 98% of the catalyst for the market over the next month," Hatfield said.

The yield on the 30-year bond gained 2.3 basis points to 4.966%. The 30-year had retreated to 4.911% earlier in the day, its lowest since April 24.

Since the war began on February 28, yields have steadily climbed as inflation worries dented market expectations for rate cuts from the Federal Reserve this year.

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 47.1 basis points.

JOBLESS CLAIMS EDGE HIGHER On the economic front, weekly initial jobless claims rose by 10,000 to a seasonally adjusted 200,000, slightly below the 205,000 estimate of economists polled by Reuters. The data was the latest read on the labor market this week and comes ahead of Friday's key government payrolls report. Other Labor Department data showed nonfarm productivity increased at a 0.8% annualized rate last quarter, below the 1.0% estimate and down from the downwardly revised 1.6% rate in the fourth quarter.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 4.1 basis points to 3.913% after sliding to 3.824%, its lowest since April 28. Federal Reserve Bank of Cleveland President Beth Hammack said she expects the central bank to hold interest rates steady for "quite some time." Separately, San Francisco Federal Reserve President Mary Daly said she was committed to returning inflation to the Fed's 2% target, and there was no indication yet that the recent surge in energy prices was pushing medium- or longer-term inflation expectations higher.

Other Fed officials scheduled to speak on Thursday included Bank of New York President John Williams and Bank of Minneapolis President Neel Kashkari.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.606% after closing at 2.591% on Wednesday. The breakeven rate had closed at 2.828% on Tuesday, its highest since August 2022.

The 10-year TIPS breakeven rate was last at 2.445%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Will Dunham)