* Middle East tensions drive oil prices higher, fueling

inflation concerns

* US economic data beats forecasts, with strong private

payrolls and factory orders

* Fed's Williams sees no need to change rates despite

inflation risks

By Chuck Mikolajczak

NEW YORK, June 3 (Reuters) - U.S. Treasury yields were

higher on Wednesday, as tensions in the Middle East reignited

following strikes by both the U.S. and Iran, sending oil prices

higher and raising concerns about sustained inflation pressures.

Iranian attacks on Kuwait damaged its airport and injured

dozens, while the U.S. military carried out strikes near the

Strait of Hormuz as attempts at diplomacy appear to have

stalled.

U.S. crude rose 1.34% to $95.01 a barrel and Brent

advanced to $97.23 per barrel, up 1.28% on the day.

"For the most part, everybody's eyes are on what's going on

in the Mideast and will continue to be," said Tom di Galoma,

managing director at Mischler Financial Group in Stamford,

Connecticut.

"As the war lingers, rates will go higher. I'm looking for

10-year notes to get up to the 4.70% to 4.75% level."

The yield on the benchmark U.S. 10-year Treasury note

rose 2 basis points to 4.475% after climbing to

4.499% on the session. After hitting a 16-month high of 4.687%

on May 19, the yield has been declining on optimism that a

U.S.-Iran peace deal could be achieved.

PRIVATE EMPLOYMENT GAINS EXCEED EXPECTATIONS

On the economic front, U.S. private payrolls increased by

122,000 last month, according to the ADP national employment

report, topping the 117,000 estimate of economists polled by

Reuters, after a downwardly revised 105,000 gain in April.

The report was the latest in a string of labor market

reports scheduled for this week, culminating in Friday's

government payrolls report.

The yield on the 30-year bond rose 1.6 basis

points to 4.983%.

Other data from the Institute for Supply Management showed its

nonmanufacturing purchasing managers index increased to 54.5

last month, besting the 53.8 estimate, from 53.6 in April.

Separately, the Commerce Department said factory orders surged

4.8% in April, the largest rise since May 2025 and above the

4.6% forecast, after an upwardly revised 1.8% advance in March.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 40.5 basis points.

Federal Reserve Bank of New York President John Williams

reiterated that he does not believe the U.S. central bank needs

to change the setting of short-term interest rates despite

upside inflation risks tied to the Middle East war and other

forces.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations for the Fed, rose

1.7 basis points to 4.068%.

After beginning the year pricing in roughly 50 basis points

worth of cuts from the Fed this year, market expectations have

shifted and are now pricing in about 20 basis points in hikes,

according to LSEG data.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.541% after closing at 2.534% on June 2.

The 10-year TIPS breakeven rate was last at

2.404%, indicating the market sees inflation averaging about

2.4% a year for the next decade.