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TREASURIES-Yields rise as U.S. housing data beats expectations

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* Treasuries yields rise after strong U.S. housing data

* Spanish debt yields fall, reducing demand for Treasuries

* Ten-year note yields hold above key 2.50 percent level

* Fed buys $970 million in bonds due 2040-2043

NEW YORK, May 16 (Reuters) - U.S. Treasuries prices fell on Friday after unexpectedly better housing data pointed to a strengthening U.S. economy, pulling benchmark 10-year yields up from six-month lows. U.S. housing starts jumped in April and building permits hit their highest level in nearly six years, offering hope that the troubled housing market could be stabilizing. "Housing starts were better than expected. They were higher in just about every region, with the Midwest having the biggest jump. That's causing the sell-off right now," said Michael Chang, an interest rate strategist at Credit Suisse in New York. Bonds rallied dramatically on Thursday despite the release of generally solid economic data. On Friday, benchmark 10-year notes were down 4/32 in price to yield 2.507 percent, up from a low of 2.473 on Thursday, the lowest since Oct. 30. Thirty-year bonds fell 1/32 in price to yield 3.329 percent, after earlier falling as low as 3.303 percent on Thursday, the lowest since June. Spanish and other peripheral European debt yields also fell on Friday, reducing safety buying of U.S. debt. Much of the rally in Treasuries on Thursday was attributed to safety buying as peripheral European debt weakened as well as to a large number of traders having to cover their positions after betting on yield increases. Some investors may have been moving out of European bonds in anticipation of a weakening euro if the European Central Bank cuts interest rates in June, as is widely expected, said Tom Di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. "I think some of the accounts are trying to get ahead of that move," he said. Treasuries are also offering much higher yields than safer European bonds including German government debt, luring investors to U.S. government bonds and pushing down their yields. "The spread between U.S. and European rates is very wide, so that should keep U.S. rates lower than what they would be otherwise because investors can reallocate their investment out of Europe and into the U.S. to capture that extra yield," Credit Suisse' Chang said. German 10-year government bonds yielded 1.33 percent on Friday, 1.18 percentage points less than equivalent Treasuries. The main focus next week will be the release on Wednesday of the Federal Reserve's meeting minutes from April. The Fed bought $970 million in bonds due from 2040 to 2043 on Friday as part of its ongoing purchase program.

(Editing by Chizu Nomiyama and Paul Simao)

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