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TREASURIES-Yields rise after better-than-expected economic data

Kate Duguid

NEW YORK, May 16 (Reuters) - U.S. Treasury yields rose on Thursday morning after three strong economic data reports: homebuilding increased more than expected in April, weekly jobless claims fell and the Philadelphia Federal Reserve index of business conditions gained in May.

The data reports came after weak retail sales numbers reported on Wednesday dampened yields and increased expectations the Fed would cut interest rates this year. Across maturities, yields on Thursday retraced the prior session's losses, with the biggest changes in short- and medium-dated notes.

Housing starts rose 5.7% to a seasonally adjusted annual rate of 1.235 million units last month, driven by gains in the construction of both single- and multi-family housing units, the Commerce Department said on Thursday. Activity in the prior month was also stronger than initially thought, suggesting declining mortgage rates were starting to provide some support to the struggling housing market.

Thursday's report builds on a strong National Association of Home Builders survey on Wednesday which showed confidence among builders rose to a seven-month high in May.

"On net, (it was) another read on the domestic housing market indicating resilience after yesterday's solid NAHB release," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Relatively cheaper home loans and a strengthening labor market, characterized by the lowest unemployment rate in nearly 50 years, are underpinning demand for housing. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 212,000 for the week ended May 11.

"This week's print is more in line with what we view to be the long-term trend. Claims will probably bounce around between 200,000 and 220,000 for a while to come," said Tom Simons, senior money market economist at Jefferies.

The two-year yield, which is a proxy for market predictions of Fed policy, rose by 3.7 basis points, last at 2.20%, recovering from a dip Wednesday to 15-month lows.

Expectations that interest rates will be at current levels in December 2019 were up at 27.8% from 24.9% yesterday, according to CME Group's FedWatch tool. About 42% of traders are pricing in one rate cut by the end of the year, with 23.4% expecting rates to be 50 basis points lower than where they currently stand by then.

By January 2020, only 22.8% of traders believe that rates will be at their current levels.

The benchmark 10-year yield was last up 3 basis points at 2.409%. The three- and five- note yields were both up 3.8 basis points. (Reporting by Kate Duguid; editing by Jonathan Oatis)