CORRECTED-TREASURIES-U.S. bond yields hit 3-week highs as Wall Street rallies

(Corrects headline, lead to say three-week highs, not three-month highs)

* U.S. factory output rises more than forecast in December

* Hopes for end to U.S.-China trade spat boost Wall Street

* U.S. consumer sentiment sags to weakest since Trump's win

* U.S. financial markets closed Monday

NEW YORK, Jan 18 (Reuters) - U.S. Treasury yields rose to three-week highs on Friday as investors piled back into Wall Street on hopes Washington and Beijing are moving to end their trade dispute and stronger-than-expected data on manufacturing production. Bond yields were on track for a second week of increase as 10-year yields climbed further from the near one-year low set two weeks ago. "The risk-on mood has caused yields to move higher," said John Canavan, market strategist at Stone & McCarthy Research Associates in New York. S&P 500 index was up 1.09 percent, while the Dow was 1.01 percent higher and the Nasdaq was up 1.1 percent. The improved outlook on trade came in the aftermath of a Wall Street Journal report that a report that U.S. Treasury Secretary Steven Mnuchin was considering lifting some or all tariffs imposed on Chinese imports. The Treasury denied Mnuchin floated such recommendation. The yield on benchmark 10-year Treasury notes hit a near three-week peak of 2.790 percent. It was last 2.786 percent, 3.9 basis points higher than Thursday's close. The 10-year yield was poised to increase almost 9 basis points this week, which would be the biggest weekly increase since the week of Nov. 2, according to Refinitiv data. Treasury yields have risen partly on competition from higher-yielding corporate bonds. Companies have raised $25.7 billion through investment-grade debt sales this week, according to IFR. Worries about a slowing U.S. economy eased following a Federal Reserve report that showed industrial output grew 0.3 percent in December, more than what analysts had forecast.

But consumer sentiment deteriorated in early January to its weakest level since October 2016, before Donald Trump's presidential victory, according to the University of Michigan.

The federal government shutdown, which is in its 28th day, remains a concern for investors as well as consumers.

Given the recent batch of mixed data and volatility in the stock market, Fed officials have signaled they are in hurry to raise interest rates again after a rate hike last month. Earlier Friday, New York Fed President John Williams said the U.S. central bank must be patient and guided by data when deciding whether to raise interest rates.. U.S. financial markets will be closed on Monday for the Martin Luther King Jr. holiday.

January 18 Friday 11:22AM New York / 1622 GMT Price

US T BONDS MAR9 144-14/32 -19/32 10YR TNotes MAR9 121-44/256 -11/32 Price Current Net Yield % Change

(bps)

Three-month bills 2.36 2.4063 -0.004 Six-month bills 2.44 2.5039 -0.001 Two-year note 99-207/256 2.6014 0.037 Three-year note 99-186/256 2.5958 0.044 Five-year note 100-8/256 2.618 0.049 Seven-year note 99-144/256 2.6944 0.046 10-year note 102-232/256 2.7842 0.037 30-year bond 105-72/256 3.102 0.026 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 18.10 -0.40 30-year vs 5-year yield 48.20 -1.95

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 15.75 -1.00

spread

U.S. 3-year dollar swap 11.75 -1.00

spread

U.S. 5-year dollar swap 8.75 -0.25

spread

U.S. 10-year dollar swap 3.25 0.00

spread

U.S. 30-year dollar swap -18.50 0.50

spread

(Reporting by Richard Leong)