TREASURIES-Yields climb on oil-driven inflation concerns

By Karen Brettell

NEW YORK, March 11 (Reuters) - U.S. Treasury yields rose on Wednesday as higher oil prices stoked inflation fears and pushed back expectations for Federal Reserve rate cuts, with traders largely looking past February consumer price inflation data that was in line with economists' expectations.

U.S. consumer prices picked up last month as the cost of gasoline increased in anticipation of an escalating war in the Middle East. The Consumer Price Index rose 0.3% last month after gaining 0.2% in January. Excluding the volatile food and energy components, the CPI gained 0.2% after rising 0.3% in January.

“The thing about this number, however, is that it's very much in the rear-view mirror because it's a February number and there's stuff going on at the moment, which puts upward pressure on prices going forward, clearly given the war in Iran,” said Padhraic Garvey, regional head of research Americas and head of global rates and debt strategy at ING.

Iran's military command said on Wednesday the world should be prepared for oil to hit $200 a barrel, as three more ships came under attack in the blockaded Gulf.

Traders have pushed back expectations of the next Fed rate cut to September on concerns that the war will last longer than hoped. If it continues, higher oil prices are also likely to dent economic growth and send yields lower.

“It's probably going to hurt the economy,” said Garvey. However, right now, “the market is saying we're going to have an inflation issue, but this is not necessarily a big hit to activity.”

Fed fund futures traders are now pricing in 33 basis points in cuts by year-end, down from 41 basis points on Tuesday, indicating rising doubts that the Fed will make two 25-basis-point cuts this year.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 5.7 basis points to 3.626%. The yield on benchmark U.S. 10-year notes US10YT=RR rose 5.5 basis points to 4.191%.

The yield curve between two- and 10-year notes US2US10=TWEB was little changed on the day at 56 basis points.

The Treasury will sell $39 billion in 10-year notes on Wednesday, the second sale of $119 billion in coupon-bearing supply this week.

The government saw soft demand for a $58 billion sale of three-year notes on Tuesday. It will also sell $22 billion in 30-year bonds on Thursday.