TREASURIES-Yields on longer-dated bonds ease from overnight highs

* Yield on 10-, 30-year Treasuries retreat from overnight highs

* Earlier sharp sell-off followed a rise in crude oil prices

* Market bets on Fed interest rate hike increase (Updates with latest market activity throughout, adds comments)

By Matt Tracy

WASHINGTON, May 18 (Reuters) - Yields on longer-dated Treasury notes climbed to their highest in over a year in overnight trading before easing back, amid a global market selloff in longer-dated bonds driven by war-related inflation concerns. The yield on the benchmark 10-year Treasury note climbed to 4.659% in overnight trading, its highest level since February 2025. It has since retraced its gains and was last flat on the day at 4.591%. The 30-year Treasury bond yield was last down just over 2 basis points (bps) at 5.126%. It reached its highest level in over a year earlier in the day.

A spike in oil prices last week exacerbated bond investors' inflation concerns as deal talks in the ongoing Iran war showed little progress. The conflict has led to ship attacks and seizures around the Strait of Hormuz, a key oil transportation route. The earlier sharp selloff on Monday followed a rise in crude oil prices past $111 and a warning by U.S. President Donald Trump on Truth Social that Iran "better get moving" on the U.S.'s latest peace proposal. "We've just got a whiplash here in terms of markets - is this good for oil? Is this bad for oil? What's happening?" said Molly Brooks, U.S. rates strategist at TD Securities. "There's not much conviction until we see the end there, and that's when we're going to really see the rally," Brooks 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 52.66 bps.

The shorter-dated two-year Treasury note yield, which typically moves in step with interest rate expectations for the Federal Reserve, was last down roughly 1 bp at 4.064%. It earlier climbed to 4.105%, its highest in 14 months.

Investors are now pricing in almost a 47.7% chance that the Fed could raise rates in December, and a 98.9% chance it maintains current rates at its next meeting in June, according to the CME FedWatch tool.

Data last week showed U.S. inflation was accelerating due to rising energy prices, with market participants worried that even a near-term end to the war may not bring energy prices down.

"Bond markets are warning that inflation could prove much stickier than many investors anticipated," said Nigel Green, CEO of global financial advisory deVere Group, in a written note.

"Even if immediate rate hikes are not the base case, investors are demanding significantly higher compensation for inflation risk, fiscal deterioration and geopolitical uncertainty," Green noted.

The Treasury Department is slated to auction 20-year bonds on Wednesday, which market participants will watch closely for signs of cooling investor demand.

"The auctions of the past several weeks, as a theme, haven't shown much appetite to bid aggressively even though yields are quite elevated in a recent context," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

"Unless we get a good concession going into the 20-year auction, I think I'd be biased for another soft result just given the geopolitical uncertainty."

(Reporting by Matt Tracy in Washington; Editing by Nick Zieminski, Gus Trompiz and Deepa Babington)