By Sarupya Ganguly

BENGALURU, May 12 (Reuters) - U.S. Treasury yields will move little in coming months, according to market strategists polled by Reuters who appear unmoved by the energy price shock from the U.S.-Israel war with Iran or comments from President Donald Trump that a fragile ceasefire is on "life support."

But forecasters appear increasingly conflicted when explaining their views on the economic impact of the war as it drags through a third month with the Strait of Hormuz remaining almost completely closed.

Many of them warn of the danger of looking through the boost to inflation from a nearly 50% surge in oil prices, while clinging to expectations the Federal Reserve will cut interest rates this year, possibly more than once, despite signals that U.S. central bank policymakers are growing more reluctant to do so.

The latest poll results were released with inflation showing signs of resurgence. The U.S. Consumer Price Index rose to 3.8% in April on a year-over-year basis, higher than the consensus forecast in a Reuters poll of economists and up from 3.3% in March.

The May 7-12 Reuters poll on the direction of Treasury yields showed strategists projected the benchmark 10-year yield would be at 4.30% in three months and 4.28% in six months, around 15 basis points below where they are now.

"Bond yields are moving back and forth within well-defined ranges, in tandem with changes in oil prices. While bonds remain volatile within the range, the broader narrative is that there will be a sharp reversal in oil prices when the conflict ends," Subadra Rajappa, head of research for the Americas at Societe Generale, wrote in a recent note to clients.

"We see no clear catalyst for a sustained selloff in bonds."

TEAM TRANSITORY OR NOT?

Prospects of a peace deal are fading, however, with Trump dismissing Tehran's ‌response to his peace proposal as "garbage."

That development means economists, central bankers and investors at minimum must contemplate a longer stretch of high energy prices just as the top job at the Fed changes hands. Current Fed Chair Jerome Powell's term ends on May 15. Kevin Warsh, Trump's nominee to replace Powell, could be confirmed in the top job by the U.S. Senate as early as Wednesday.

"It is surprising how quickly people are willing to rejoin team 'transitory,'" said Vincent Reinhart, a former Fed staffer who is now chief economist at BNY Investments, referring to the 2021 characterization by Powell and other Fed officials of the pandemic-era inflation surge as a "transitory" event.

Reinhart predicted the 10-year yield could head in the same direction as 20-year and 30-year Treasury yields, moving beyond 5% next year. He still, however, forecasts at least one and possibly two Fed rate cuts this year.

"But even if oil prices stay high, it should only be a temporary effect on inflation. Prices will adjust to the higher level, but they don't have to keep going up. So inflation will be transitory in that sense," Reinhart said.

The International Energy Agency says the energy shock is the biggest ever.

GOING AGAINST THE TREND

Expectations for restrained economic activity and lower yields go against the trend since the war began on February 28.

The 10-year yield has risen nearly 50 bps from around 4.0% in March, with rate futures also pricing out all rate cuts and bracing for a prolonged hold - with even a slim chance of a hike. US10YT=RR

Much of that stance reflects firmer inflation expectations visible in market gauges such as short-term breakevens.

The rate-sensitive 2-year yield is predicted to decline about 24 bps to 3.73% in three months and to 3.60% in six months, poll medians showed. It has risen nearly 60 basis points since the war began.

Several analysts flagged the risk of higher bond yields.

"We've got a good amount of supply, inflation percolating up a little bit, a new Fed chair who'll potentially look to reduce the Fed's balance sheet over time," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Investment Institute.

"Add all that up and over the rest of this year and the next, you'll likely see long-term yields increase."