TREASURIES-US yields rise after report of Iran negotiation halt?

* Iran halts US talks, oil prices surge, market reacts to geopolitical tensions

* US Treasury yields jump, 10-year note posts biggest rise in two weeks

* Fed rate hike expectations increase as high oil prices persist, Strait of Hormuz remains closed

By Chuck Mikolajczak

NEW YORK, June 1 (Reuters) - U.S. Treasury yields climbed on Monday, with the benchmark 10-year Treasury note on track for its biggest daily jump in two weeks, after a report that Iran was halting talks with the United States sent oil prices sharply higher. Iran's Tasnim news agency said Tehran's negotiating team is stopping exchanges of messages with the United States through mediators due to attacks on Lebanon, as diplomatic efforts to end the three-month-old Iran war continue.

U.S. crude surged 7.82% to $94.19 a barrel and Brent shot up to $97.30 per barrel, up 6.78% on the day following the report.

"It's somewhat of a sharp reaction, but at the same time, I kind of feel as if there is a somewhat of a longer barrier than usual where the market kept thinking that this could get resolved, this could get resolved, this could get resolved, and then today's announcement is in a category of a commentary that contradicted that," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

The yield on the benchmark U.S. 10-year Treasury note rose 5.5 basis points to 4.508% and was on pace for its biggest daily jump since a 13.6 basis point climb on May 15.

Yields fell last week on cautious optimism progress was being made towards a peace agreement between the U.S. and Iran, which pushed oil prices down to their lowest level since mid-April.

The yield on the 30-year bond added 2.8 basis points to 5.021%.

MANUFACTURING DATA BEATS FORECASTS Yields briefly extended gains after the Institute for Supply Management said its manufacturing PMI advanced to 54.0 last month, the highest reading since May 2022 and above the 53.0 estimate of economists polled by Reuters, from 52.7 in April.

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 42.4 basis points.

Separately, the Commerce Department said construction spending rose 0.4% after a downwardly revised 0.2% increase in March and compared with forecasts for a 0.2% gain. "Today's economic data is going to be overshadowed by the increased tension between Iran and the U.S.," said Barnes.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Federal Reserve, climbed 6.8 basis points to 4.082%.

The persistently high crude prices as the Strait of Hormuz has remained closed has altered market expectations for the Fed this year. Markets are now pricing in about a 60% chance for a hike of at least 25 basis points at the central bank's December meeting, up from about 45% on in the prior session, after pricing in roughly two cuts at the start of the year.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.579% after closing at 2.53% on May 29.

The 10-year TIPS breakeven rate was last at 2.43%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci )