TREASURIES-Yields rise as stocks gain, Yellen optimistic on economy

(Recasts, adds quotes, details, updates prices)

* Prices fall as China growth beats expectations, stocks

rise

* Industrial production strong, housing data disappoints

* Yellen optimistic on economy; stresses jobs, inflation

* Five, seven-year notes underperform after Yellen

* Treasury to sell $18 bln, 5-yr TIPS on Thursday

By Karen Brettell

NEW YORK (Frankfurt: HX6.F - news) , April 16 (Reuters) - U.S. Treasuries prices fell

on Wednesday as rising stocks reduced demand for lower risk

government bonds, and as Federal Reserve Chair Janet Yellen

expressed optimism on the economy.

Better-then-expected growth in China, the world's largest

economy, and a rally in Yahoo (TLO: YA-U.TI - news) shares helped stocks rise for a

third straight session.

U.S. economic reports showed signs of overall strength. The

data came as Yellen stressed that employment and inflation will

be key to the still distant decision over when to raise interest

rates.

"The main message continues to be that the Fed remains

committed to providing a helping hand to the economic recovery,

while becoming more confident in the ability of the recovery to

finally achieve liftoff later this year," said Millan Mulraine,

deputy chief economist at TD Securities in New York.

More Wall Street economists believe the U.S. central bank

will raise interest rates in the first half of 2015, as evidence

builds that the U.S. economy has regained some momentum lost

during an unusually rough winter, a Reuters survey showed

earlier this month.

Five-year notes and seven-year notes,

which are the most sensitive to interest rate policy, were the

worst performers after Yellen's comments.

Five-year notes were last down 4/32 in price to yield 1.65

percent, up from 1.62 percent late on Tuesday. Seven-year notes

fell 5/32 in price to yield 2.21 percent, up from 2.18 percent.

Benchmark 10-year notes dropped 2/32 in price to

yield 2.64 percent, down from 2.67 percent earlier on Wednesday.

The yields fell to one-and-a-half month lows of 2.60 percent on

Tuesday, as concerns about escalating tension in Ukraine sparked

safety buying and a weak New York manufacturing survey raised

fears over the strength of the U.S. recovery.

Data on Wednesday was mixed, but was overall seen as more

bullish than bearish for the economy.

U.S. industrial production rose at a faster-than-expected

clip in March, and groundbreaking for new homes increased, but

remained well below the post-recession peak hit in November,

signaling the drag the housing market is placing on the

economy.

"Industrial production and capacity utilization were both

stronger than expected, probably trumping the housing starts

number, which was a little bit weaker," said Lou Brien, a market

strategist at DRW Trading in Chicago.

The Fed also said that U.S. economic activity picked up in

recent weeks as weather-related drag lifted in its Beige Book

report of anecdotal information on business activity collected

from contacts nationwide.

Data on Thursday, including a Philadelphia manufacturing

survey, will be watched for further signals on the state of the

economy.

Demand for inflation-linked debt will also be tested on

Thursday when the Treasury sells $18 billion in five-year

Treasury inflation-protected securities, or TIPS.

TIPS have been among the worst performing assets since the

Fed last year indicated it would begin paring its bond purchase

program, leading many to wonder what will spark inflation, which

continues to run below Fed targets of 2 percent.

Yellen on Wednesday emphasized that she still views low

inflation as due to temporary influences and believes that it is

likely to gradually rise back to the 2 percent level.

Dallas Fed President Richard Fisher said on Wednesday that

he is "not uncomfortable" with the current low level of U.S.

inflation, and will not vote for or support any policy that

drives it above the Fed's long-term 2-percent goal.

Atlanta Fed President Dennis Lockhart also spoke on

Wednesday, saying the Fed should try to make its communications

on the expected path of interest rates more consistent with its

policy statements.

The Fed bought $1.02 billion in bonds due from 2036 to 2044

on Wednesday as part of its ongoing purchase program.

The bond market will close early on Thursday and be closed

all day on Friday for the Good Friday holiday.

(Editing by Meredith Mazzilli, Jonathan Oatis and Chris Reese)