TREASURIES-Yields rise as traders weigh possible Iran deal, Fed policy

(Updated in New York afternoon time)

* Traders monitor potential US-Iran peace deal

* Policy meeting under new Fed Chair Kevin Warsh may bring changes to communication style

* Markets expect interest rates to remain on hold

* Focus will be on Warsh's press conference, rate-hike signals

By Karen Brettell

NEW YORK, June 12 (Reuters) - U.S. Treasury yields rose from one-week lows on Friday as traders focused on the prospect of a peace deal with Iran and looked ahead to next week's Federal Reserve policy meeting, which will be the first under the leadership of Kevin Warsh.

Yields fell on Thursday after U.S. President Donald Trump said he was calling off new military strikes on Iran because a deal was now ready.

The Friday rally "was purely from a peace optimism standpoint," said Will Compernolle, a macro strategist at FHN Financial. Friday's trading reversed some of Thursday's move, though yields pared an earlier increase as the United States and Iran signaled that an agreement to end their war was close. The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last up 0.7 basis points at 4.077%.

The yield on benchmark U.S. 10-year notes rose 1.4 basis points to 4.479%.

The yield curve between 2- and 10-year notes was little changed on the day at 39.6 basis points. Traders were also weighing what changes Warsh, who replaced Jerome Powell as Fed chief about a month ago, may make at the June 16-17 meeting. Some speculated he could decline to submit his own rate projections in the "dot-plot" chart that will be released after the meeting concludes or alter other communication practices, given his preference for less forward guidance. The central bank's policy-setting Federal Open Market Committee is widely expected to keep rates on hold and may drop the easing bias from its statement, given that the labor market has improved and inflation remains well above the central bank's 2% target.

Traders will be looking for any signals on whether a rate hike is likely as fed funds futures traders price in a 55% chance of an increase by December.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said markets could react hawkishly if a significant number of Fed policymakers signal expectations for a rate increase.

Any discussion of reducing the size of the Fed's balance sheet will also draw attention.

Markets will focus on how Warsh communicates at the press conference, said Compernolle.

"Powell was very transparent ... He was saying everything he felt he could commit to, but he also spoke for the median FOMC participant," he added.

Powell will remain at the Fed as governor and will continue to have a vote on the interest rate setting committee. Traders are also monitoring signs of liquidity stress as companies issue debt and equity at a record pace. SpaceX blew past $2 trillion in market valuation in its Nasdaq debut on Friday.

"There's questions about market liquidity given the larger IPOs coming to market," said Goldberg, adding that so far, there did not appear to be any stresses.

Goldberg said Monday's corporate tax deadline could also pull cash from the market. (Reporting by Karen Brettell; Editing by Paul Simao and Nia Williams)