* Fed funds futures price a 71% chance of a rate hike by

September

* Five-year TIPS breakevens rose to 2.31% from 2.21% on June

24

* The Treasury will sell $13 billion in 20-year bonds on

Wednesday

(Updated in New York morning time)

By Karen Brettell

NEW YORK, July 22 (Reuters) - Benchmark 10-year U.S.

Treasury yields climbed to a two-month high on Wednesday as

rising oil prices stoked concerns that renewed energy

disruptions stemming from the escalating conflict with Iran

could reignite inflation and increase the odds of Federal

Reserve interest rate hikes.

The resurgence of tensions in the Iran war has pushed

inflation worries back into focus, following a brief lull after

a ceasefire deal was reached in late June.

Oil prices surged to a near six-week high on Wednesday as U.S.

Secretary of State Marco Rubio said Iran is not serious about

negotiating an end to the conflict, as the widening war

threatens to disrupt two of the world's most critical energy

chokepoints.

The Fed is increasingly being viewed as leaning hawkish after

policymakers signaled at their June 16-17 meeting that they

expect to raise borrowing costs later this year.

Adding to that view, Fed Governor Christopher Waller said last

week that the central bank may need to raise interest rates "in

the near term" if incoming data show inflation running well

above the 2% target.

"Waller had a hawkish shift in tone, with an emphasis that

was totally independent of energy pass-through," said Will

Compernolle, macro strategist at FHN Financial. "That set a new

anchor for a hawkish policy trajectory that had nothing to do

with how the war evolved."

Fed funds futures traders currently see just a 26% chance of

a rate hike when the central bank concludes its two-day meeting

on July 29, but they are pricing in 71% odds of an increase by

September and an 88% probability of one by year-end.

U.S. Treasury yields have also been pushed higher by rising

gilt yields, driven by fiscal concerns as Andy Burnham takes

over as British prime minister.

"The focus is on fiscal worries in Europe," Compernolle

said, adding that "there's just a general sell-off in global

sovereign debt."

The 2-year note yield, which typically moves in

step with Fed interest rate expectations, rose 1.12 basis points

to 4.272%.

The yield on benchmark U.S. 10-year notes rose

1.03 basis points to 4.638% and reached 4.655%, the highest

since May 20.

The yield curve between 2- and 10-year notes

was at 36.4 basis points.

Inflation expectations have climbed as well. Breakeven rates

on five-year Treasury Inflation-Protected Securities rose to

2.31% - implying investors expect annual inflation of 2.31% over

the next five years - after dipping to 2.21% on June 24.

Real yields, which strip out expected inflation, also moved

higher, with 10-year TIPS yields reaching 2.375% on Wednesday,

their highest level since the "tariff tantrum" of April 2025.

The Treasury Department will sell $13 billion in 20-year

bonds on Wednesday and $21 billion in 10-year TIPS on Thursday.