(Recasts; adds analyst quote; updates yields)
By Kate Duguid
NEW YORK, May 16 (Reuters) - Three encouraging economic data reports on Thursday morning and a rebound in equity prices pushed Treasury yields higher in the North American session.
On Thursday, the United States reported that 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-dated notes, pulling the yield curve to its flattest in a week.
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.
Stronger earnings on Wall Street from companies like Walmart Inc and Cisco Systems Inc may have also helped boost yields. All three major U.S. stock indexes were up about 1%, bringing the bellwether S&P 500 to within 2% of an all-time high reached on April 30.
However, some analysts were taken aback by the relatively small reaction in the rates market. "I'm a little surprised that with stocks so strong, the yields aren't even higher because this doesn't seem to be that big of a move in the scheme of things," said Lou Brien, market strategist at DRW Trading.
The two-year yield, which is a proxy for market predictions of Fed policy, rose by 3 basis points, last at 2.20%, recovering from a dip Wednesday to 15-month lows. The benchmark 10-year yield was last up 2.1 basis points at 2.40%. The five- and seven-year note yields were both up 2.3 basis points. (Reporting by Kate Duguid; editing by Jonathan Oatis and Lisa Shumaker)