TREASURIES-Yields edge up as inflation fears overtake safe-haven demand

SINGAPORE/LONDON, March 2 (Reuters) - Short-dated U.S. Treasury yields rose on Monday as an early bout of safe-haven buying over the risk of a drawn-out Middle East conflict gave way to investor concern about a spike in global inflation due to a surge in oil prices.

Two-year Treasury yields US2YT=RR, which are the most sensitive to any changes in expectations for U.S. monetary policy, rose nearly 3 basis points on the day to 3.406% as prices fell. They traded earlier at their lowest since August 2022.

Oil prices LCOc1 gained as much as 13% on Monday, after shipping in the crucial Strait of Hormuz was disrupted by retaliatory Iranian attacks following initial bombing by Israel and the United States that killed Iranian Supreme Leader Ali Khamenei.

Israel launched new air strikes targeting Tehran and expanded its military campaign to include attacks on Iran-backed Hezbollah militants in Lebanon on Monday, as U.S. President Donald Trump signaled the U.S.-Israeli military assault on Iranian targets could continue for weeks.

"Treasuries (are) actually trading softer, led by the long-end of the curve, likely a result of inflation expectations being boosted by the surge in energy costs," Pepperstone senior research strategist Michael Brown said.

Thirty-year Treasury yields US30YT=RR were up 2 bps on the day at 4.652%.

Market-based inflation expectations held firm. The two-year breakeven inflation rate, which is derived from subtracting the yield on a two-year inflation-linked Treasury note from two-year nominal yields, was a touch firmer at 2.544%, its highest for nearly a month.