TREASURIES-US yields climb on signs of economy holding up despite higher interest rates

(Updates prices, adds economic data, comments) By Davide Barbuscia and Herbert Lash NEW YORK, May 16 (Reuters) - Treasury yields climbed further on Tuesday after data showed the U.S. economy was holding up despite higher interest rates, a reminder that Federal Reserve efforts to cool inflation by slowing growth still has a ways to go. Government bond yields, which move inversely to their price, declined overnight on the back of lower-than-anticipated economic data overseas, with China's industrial output in April missing expectations by a large margin. But yields changed direction after U.S. economic data showed resilient consumer consumption as well as better-than-expected industrial output. U.S. retail sales increased less than expected in April, rising 0.4% against forecasts of a 0.8% increase, but the underlying trend was solid. Production at U.S. factories, meanwhile, surged last month to beat forecasts. Separately, U.S. homebuilder sentiment rose to a 10-month high in May as tight housing supply boosted demand for new construction, according to a survey on Tuesday. "Relative to the last couple months retail sales held up decent in April," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. "Overall, the economic data trend has been coming in better than feared." Treasury yields rose roughly four basis points after the retail sales release as the data reinforced the belief that the Fed will keep rates higher for longer to bring down inflation, though an slowdown later this year remains priced in. Whether an anticipated credit crunch sparks a recession that leads to the Fed cutting rates by year's end has divided the market, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York. "We don't see a systemic credit problem, they don't either," said Ricchiuto, referring to Fed officials, "and they're trying to let the market know you guys are incorrect in your market pricing. "They're trying to convince the market that we're not going to be cutting rates quickly, we really believe in higher for longer," he said. Several Fed officials have reiterated this week that the U.S. central bank still has work to do to contain price pressures. Fed funds futures show about an 85% probability the Fed will maintain rates unchanged at its two-day meeting ending June 14, but also show rate cuts of about 60 basis points by December. Richmond Federal Reserve President Thomas Barkin said he was "comfortable" with raising interest rates further if needed. The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 7.2 basis points at 4.076%, while the yield on benchmark 10-year notes added 3.9 basis points to 3.547%. One-month Treasury bills hit a new record high of 5.886% - by far the highest-yielding point in the Treasury curve - as worries grow that the U.S. government may default as soon as June if its $31.4 trillion borrowing cap is not raised. Investors are closely watching the outcome of a meeting later on Tuesday between Democratic President Joe Biden and top congressional Republican Kevin McCarthy as they try to make progress on a debt ceiling agreement. The market-implied probability of a default was 3.8%, MSCI Research said, based on U.S. government one-year credit default swaps (CDS) spreads from S&P Global Market Intelligence as of May 15. May 16 Tuesday 3:12 p.m. New York / 1912 GMT Price Current Yield % Net Change (bps) Three-month bills 5.0675 5.2053 0.029 Six-month bills 5.015 5.2312 0.032 Two-year note 99-160/256 4.0757 0.072 Three-year note 99-176/256 3.7362 0.064 Five-year note 99-232/256 3.5205 0.051 Seven-year note 99-208/256 3.5304 0.043 10-year note 98-144/256 3.5471 0.039 20-year bond 98-208/256 3.9619 0.034 30-year bond 95-180/256 3.8683 0.026 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 19.00 -0.75 spread U.S. 3-year dollar swap 13.75 -0.75 spread U.S. 5-year dollar swap 7.00 -0.25 spread U.S. 10-year dollar swap -1.00 0.00 spread U.S. 30-year dollar swap -44.50 0.25 spread (Reporting by Davide Barbuscia Editing by Mark Potter and Nick Zieminski)