TREASURIES-Wall Street rally lifts U.S. bond yields to 3-week peaks

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

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

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

* U.S. stock, bond markets to close Monday

(Updates market action, adds quotes) NEW YORK, Jan 18 (Reuters) - U.S. Treasury yields climbed to three-week highs on Friday as investors piled back into Wall Street on hopes Washington and Beijing were moving to end their trade dispute as well as on stronger-than-expected data on manufacturing output. Bond yields increased for a second week as 10-year yields climbed further from the near one-year low on Jan. 4. "It's a belief the thaw between the U.S. and China is growing so that's stabilizing markets. The risk-on environment is weighing on bonds here," said Craig Bishop, lead strategist of U.S. fixed income strategies at RBC Wealth Management in Minneapolis. The improved outlook on trade came in the aftermath of a Wall Street Journal 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 a recommendation. The S&P 500 index was up 1.10 percent, while the Dow was 1.15 percent higher and the Nasdaq was up 0.81 percent. The yield on benchmark 10-year Treasury notes hit a three-week peak, last trading at 2.781 percent, 3.4 basis points above Thursday's close. The 10-year yield climbed about 8 basis points this week, its biggest weekly rise 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 production grew 0.3 percent in December as manufacturing output surged, more than what analysts had forecast. But consumer sentiment deteriorated in early January to its weakest since October 2016, before Donald Trump's presidential victory, according to a University of Michigan survey.

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 no hurry to raise interest rates again after a rate hike last month. Interest rates futures implied traders saw about a 27 percent chance of a rate increase by year-end, up from 19 percent a week earlier but down from 40 percent a month ago, CME Group's FedWatch program showed. 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. San Francisco Fed chief Mary Daly said she was leaning toward pausing rate hikes for a while. U.S. financial markets will be closed on Monday for the Martin Luther King Jr. holiday. January 18 Friday 3:04PM New York / 2004 GMT Price

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

(bps)

Three-month bills 2.355 2.4012 -0.009 Six-month bills 2.4375 2.5013 -0.004 Two-year note 99-202/256 2.6118 0.048 Three-year note 99-182/256 2.6013 0.049 Five-year note 100-8/256 2.618 0.049 Seven-year note 99-144/256 2.6944 0.046 10-year note 102-236/256 2.7824 0.035 30-year bond 105-112/256 3.0943 0.018 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 16.90 -1.65 30-year vs 5-year yield 47.50 -2.70

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 15.25 -1.50

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 -18.25 0.75

spread

(Reporting by Richard Leong; Editing by Chris Reese and Andrea Ricci)