(Updates with latest yields, adds subsequent economic data,

Iran developments in paragraphs)

WASHINGTON, May 28 (Reuters) - Yields on benchmark U.S.

Treasury notes fell on Thursday as the United States and Iran

reached an agreement on a memorandum of understanding to extend

their ceasefire for another 60 days, a step toward ending their

three-month-old war.

Earlier, yields had eased off session highs following a batch of

mixed U.S. economic data showing weaker growth, faltering

capital expenditures and steady inflation. The less-than-stellar

economic numbers could ease pressure on the US central bank to

maintain or raise interest rates.

"What the numbers point to today is simply that we have a

stagflation problem," said Peter Cardillo, chief market

economist at Spartan Capital Securities. "And that's a big

problem for the Fed."

Meanwhile St. Louis Federal Reserve President Alberto

Musalem told an economic conference in Iceland on Thursday that

the U.S. central bank may in fact need to increase its policy

rate if inflation does not resume easing within the next six

months.

A $44 billion auction of 7-year US Treasury notes in the

afternoon showed demand a touch above average at 2.52 times the

notes on sale.

Earlier on Thursday, Iran targeted a U.S. air base in Kuwait

following a U.S. strike on what American officials called an

Iranian drone operation near the Strait of Hormuz.

The renewed violence underscored the fraught nature of

negotiations to turn April's tenuous ceasefire into an agreement

to end the three-month-old war that has choked global fuel

supplies and clouded the outlook for U.S. monetary policy.

Separately, the U.S. reported on Thursday that the pace of

new home sales had slowed in April. The Commerce Department is

also due on Friday to release April data on the U.S. trade

balance.

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

was last down 2.4 basis points to 4.457%. The

yield on the 30-year bond had fallen2.4 basis

points to 4.987%.

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 43.0 basis points.

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

typically moves in step with interest rate expectations for the

Fed, fell 0.8 basis points to 4.025%.

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

Inflation-Protected Securities (TIPS) was last at

2.554% after closing at 2.551% on May 27.

The 10-year TIPS breakeven rate was last at

2.406%, indicating the market sees inflation averaging about

2.4% a year for the next decade.