TREASURIES-US yields advance as tensions in Gulf flare

* Middle East tensions drive oil prices higher, fueling inflation concerns

* US economic data beats forecasts, with strong private payrolls and factory orders

* Fed's Williams sees no need to change rates despite inflation risks

By Chuck Mikolajczak

NEW YORK, June 3 (Reuters) - U.S. Treasury yields were higher on Wednesday, as tensions in the Middle East reignited following strikes by both the U.S. and Iran, sending oil prices higher and raising concerns about sustained inflation pressures. Iranian attacks on Kuwait damaged its airport and injured dozens, while the U.S. military carried out strikes near the Strait of Hormuz as attempts at diplomacy appear to have stalled. U.S. crude rose 1.34% to $95.01 a barrel and Brent advanced to $97.23 per barrel, up 1.28% on the day.

"For the most part, everybody's eyes are on what's going on in the Mideast and will continue to be," said Tom di Galoma, managing director at Mischler Financial Group in Stamford, Connecticut. "As the war lingers, rates will go higher. I'm looking for 10-year notes to get up to the 4.70% to 4.75% level." The yield on the benchmark U.S. 10-year Treasury note rose 2 basis points to 4.475% after climbing to 4.499% on the session. After hitting a 16-month high of 4.687% on May 19, the yield has been declining on optimism that a U.S.-Iran peace deal could be achieved.

PRIVATE EMPLOYMENT GAINS EXCEED EXPECTATIONS On the economic front, U.S. private payrolls increased by 122,000 last month, according to the ADP national employment report, topping the 117,000 estimate of economists polled by Reuters, after a downwardly revised 105,000 gain in April.

The report was the latest in a string of labor market reports scheduled for this week, culminating in Friday's government payrolls report.

The yield on the 30-year bond rose 1.6 basis points to 4.983%. Other data from the Institute for Supply Management showed its nonmanufacturing purchasing managers index increased to 54.5 last month, besting the 53.8 estimate, from 53.6 in April. Separately, the Commerce Department said factory orders surged 4.8% in April, the largest rise since May 2025 and above the 4.6% forecast, after an upwardly revised 1.8% advance in March. 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 40.5 basis points. Federal Reserve Bank of New York President John Williams reiterated that he does not believe the U.S. central bank needs to change the setting of short-term interest rates despite upside inflation risks tied to the Middle East war and other forces. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 1.7 basis points to 4.068%.

After beginning the year pricing in roughly 50 basis points worth of cuts from the Fed this year, market expectations have shifted and are now pricing in about 20 basis points in hikes, according to LSEG data. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.541% after closing at 2.534% on June 2. The 10-year TIPS breakeven rate was last at 2.404%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak, Editing by Nick Zieminski)