Updates to afternoon U.S. trading

By Chuck Mikolajczak

NEW YORK, April 7 (Reuters) - U.S. Treasury yields were little changed in choppy trading on Tuesday as a deadline set by U.S. President Donald Trump for Iran to open the Strait of Hormuz drew closer with little sign an agreement could be reached.

Trump has given Iran until 8 p.m. EDT in Washington - 3:30 a.m. in Tehran - to end its blockade of Gulf oil, or the U.S. military will destroy every bridge and power plant in Iran. Iran says it would retaliate against U.S. allies in the Gulf, whose desert cities would be uninhabitable without power or water.

Talks between the U.S. and Iran were at risk of being derailed following Tehran's attacks on Saudi Arabian industrial facilities, two Pakistani sources with knowledge of the discussions told Reuters.

"That's the mother of all deadlines right there and everybody seems to be waiting for it," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group.

"I don't think anybody really wanted to buy Treasuries with the chance that oil could go to $150 (a barrel) and that's the scary part of this whole thing. They should be buying Treasuries as a safe-haven bid, but for the most part, it's very tough to do with the chance that oil could accelerate."

Higher oil prices force the Federal Reserve to keep interest rates higher, putting pressure on Treasury prices.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB edged up 0.6 basis point to 4.341% after earlier reaching a session high of 4.38%.

FED OFFICIALS WARN ABOUT INFLATION IMPACT

New York Federal Reserve President John Williams said the energy shock resulting from the war will drive up overall inflation over the course of this year, while reiterating that monetary policy is in the right place to deal with what happens in the U.S. economy.

Concerns about rising crude prices were echoed by Chicago Federal Reserve Bank President Austan Goolsbee, who said he is worried that the Iran war will drive inflation higher even as it slows the U.S. economy, putting the Fed in an uncomfortable position where there is no obvious "cookbook" for what to do.

U.S. crude CLc1 rose 1.65% to $114.26 a barrel and Brent LCOc1 fell to $109.67 per barrel, down 0.09% as Trump's deadline approached.

European and Asian refiners are paying record high prices of near $150 a barrel for some crude oil grades, far exceeding prices for paper futures, underscoring the worsening supply crisis from the U.S.-Israeli war on Iran.

The yield on the 30-year bond US30YT=TWEB rose 2.7 basis points to 4.917%.

On the economic front, new orders for key U.S.-manufactured capital goods increased more than expected in February while shipments of those products rose solidly, suggesting business spending on equipment was on firmer footing before the start of the war with Iran.

MORE TREASURY SUPPLY COMING THIS WEEK

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 50.6 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.7 basis points to 3.833% after climbing to 3.877%.

Yields moved lower after an auction of $58 billion in 3-year notes US3YT=RR that was seen as solid by analysts, with demand for the debt an above-average 2.68 times the notes on sale.

More supply will come to the market this week in the form of $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.657%, its highest level since March 20, after closing at 2.654% on Monday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.374%, indicating the market sees U.S. inflation averaging about 2.4% a year for the next decade.