By Chuck Mikolajczak

NEW YORK, July 13 (Reuters) - U.S. Treasury yields advanced on Monday, as hostilities between the U.S. and Iran intensified and pushed up crude prices, fanning concerns about inflation pressures and their impact on Federal Reserve monetary policy.

U.S. and Iranian forces exchanged missile and drone attacks on Monday and clashed over control of the Strait of Hormuz, casting doubt on the viability of an interim deal to halt their war, with Iran announcing over the weekend that the strait was closed.

U.S. crude CLc1 rose 4.54% to $74.65 a barrel and Brent LCOc1 climbed to $79.44 per barrel, up 4.51% on the day.

Monday's gains for oil built on a rise in the prior week that marked the biggest weekly gains in roughly two months as an escalation in attacks jeopardized a deal reached last month to reopen the strait and cease hostilities.

Yields extended gains along with crude prices after U.S. President Donald Trump said the U.S. was reinstating a naval blockade on Iran, and would be reimbursed 20% on all cargo shipped through the Strait of Hormuz after Tehran claimed it had closed the strait, with the 10-year note yield hitting its highest level in nearly eight weeks.

"The big thing right now is the Strait of Hormuz, and what the impact that's going to do to energy prices, and then the long-lasting impact to inflation, and then just overall bond yields in general and Fed policy and so forth," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"At this point, it is just on again, off again, on again, off again, and the market is trading on that, and that's what's contributing to the volatility, that's what's contributing to why yields are where they are and why they're behaving the way they're behaving."

TEN-YEAR YIELD HITS EIGHT-WEEK HIGH

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 2.8 basis points to 4.597% after climbing to 4.606%, its highest since May 21.

The increase in crude prices comes ahead of a key inflation reading scheduled for Tuesday, when the Labor Department will release its Consumer Price Index for June.

The yield on the 30-year bond US30YT=TWEB rose 1.8 basis points to 5.089% after touching 5.097%, its highest since May 22.

Several Fed officials have in recent weeks flagged concerns about inflation pressures, including during the last policy meeting in June, according to the minutes.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 34.7 basis points.

RATE HIKE EXPECTATIONS RISE

Expectations for a hike of at least 25 basis points at the Fed's meeting later this month stand at 39%, up from the 34.2% in the prior session. For the September meeting, markets are pricing in a 71.6% chance of a hike, up from 69.6%.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 4 basis points to 4.248% after ascending to 4.256%, its highest since February 2025.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.306% after closing at 2.293% on July 10.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.261%, indicating the market sees inflation averaging about 2.3% a year for the next decade.