US Treasury yields rise as escalating Iran war fans inflation fears

SINGAPORE, March 23 (Reuters) - U.S. Treasury yields hit multi-month highs on Monday as the escalating war in the Middle East kept oil prices elevated and intensified investor worries about its impact on inflation.

The benchmark 10-year yield US10YT=RR rose to an eight-month peak of 4.4150% early in Asia before retreating slightly to 4.4095%, while the two-year yield US2YT=RR hovered near a more than seven-month top of 3.9434%.

The moves came as Iran warned it would strike energy and water infrastructure across the Gulf if U.S. President Donald Trump follows through on his threat to attack its electricity grid.

"This is potentially a substantial escalation in the war. Destruction of oil and gas infrastructure takes us closer along the spectrum towards worst-case scenarios where energy and other commodity supplies remain throttled indefinitely," said Benjamin Picton, senior market strategist at Rabobank.

The inflationary pulse from energy has seen markets abandon hopes for further monetary easing globally and swing to pricing in rate hikes across most developed nations, following a hectic week of central bank decisions where policymakers struck a hawkish tone.

Futures 0#FF: have wiped out expectations for 50 basis points of easing from the Federal Reserve this year, with even a small chance the next move could be up. 0#USDIRPR

"The market is starting to see this as more than just a geopolitical flare-up," said Charu Chanana, Saxo's chief investment strategist.

"Looking at Friday's bond selloff, with Treasury and European yields jumping as investors repriced inflation and pushed back rate-cut expectations, and the market is beginning to worry about a more durable stagflationary impulse."