UPDATE 1-U.S. 30-year mortgage rates hit 7-year peak -Freddie Mac

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NEW YORK, May 17 (Reuters) - Interest rates on U.S. 30-year fixed-rate mortgages rose to the highest in seven years as a bond market selloff this week propelled 10-year yields to the highest since July 2011, Freddie Mac said on Thursday.

Higher borrowing costs have not yet caused a meaningful squeeze on the housing market, as underlying demand remains solid, Freddie Mac chief economist Sam Khater said.

While this years higher mortgage rates have not caused much of a ripple in the strong demand levels for buying a home seen in most markets, inflationary pressures and the prospect of rates approaching 5 percent could begin to hit the psyche of some prospective buyers, he said in statement.

Thirty-year mortgage rates averaged 4.61 percent in the week ended May 17, matching the level last seen in May 2011. A week earlier, 30-year rates averaged 4.55 percent, the U.S. mortgage finance agency said.

Average 15-year mortgage rates rose to 4.08 percent in the latest week from 4.01 percent, while interest rates on five-year adjustable mortgages averaged 3.82 percent, up from 3.77 percent a week earlier, Freddie Mac said.

Worries about rising inflation and government borrowing lifted the 10-year Treasury yield to 3.122 percent earlier Thursday, the highest since July 2011, Reuters data showed.

(Reporting by Richard Leong Editing by Bernadette Baum and Chris Reese)