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TREASURIES-U.S. 10-year yield hovers near 7-year peak after bond selloff

(Updates market action, adds quote) By Richard Leong NEW YORK, May 16 (Reuters) - U.S. Treasury yields were little changed on Wednesday, with the 10-year yield hovering near a seven-year high following a bond market selloff spurred by signs the U.S. economy is on a stronger footing in the second quarter.

Disappointing growth data on Japan, together with concerns about the financial demands of a potential Italian coalition government from its neighbors, caused a drop in German bond yields and stemmed another jump in U.S. yields.

Tuesday's sharp rise in the 10-year yield above 3.05 percent, which was seen as a key technical support level, unnerved Wall Street as traders considered whether U.S. bonds are gaining appeal as an alternative to riskier stocks.

As the bond market stabilized, investors said U.S. yields would likely hold at the higher levels until there were meaningful changes in economic data or signs that Federal Reserve officials are moving away from the current monetary policy stance of a gradual pace of interest rate increases, analysts said.

"Cooler heads have prevailed following bets that pushed up the 10-year yield based on more optimism about growth and inflation," said Craig Bishop, lead strategist of the fixed income group at RBC Wealth Management in Minneapolis.

Data on Wednesday supported traders' view that the economy is expanding but far from firing on all cylinders.

U.S. industrial output grew 0.7 percent in April, while home construction declined 3.7 percent last month, government data showed.

At 10:55 a.m. (1455 GMT), the 10-year Treasury yield was up 0.9 basis point at 3.089 percent after touching 3.095 percent, which was the highest level since July 2011, on Tuesday, Reuters data showed.

The 10-year yield reversed an initial decline as Wall Street stock prices recovered some of Tuesday's losses. It fell earlier in step with a fall in German Bund yields.

May 16 Wednesday 11:01 AM EDT/ 1501 GMT Price US T BONDS JUN8 140-29/32 -0-5/32 10YR TNotes JUN8 118-140/256 -0-16/256 Price Current Net Yield % Change (bps) Three-month bills 1.8825 1.9178 0.003 Six-month bills 2.0375 2.0873 0.002 Two-year note 99-154/256 2.5851 0.000 Three-year note 99-160/256 2.7563 0.000 Five-year note 99-44/256 2.9306 0.006 Seven-year note 98-228/256 3.0531 0.006 10-year note 98-36/256 3.0927 0.013 30-year bond 98-68/256 3.2155 0.007 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 22.50 1.00 spread U.S. 3-year dollar swap 16.75 1.00 spread U.S. 5-year dollar swap 9.00 1.00 spread U.S. 10-year dollar swap 3.00 0.25 spread U.S. 30-year dollar swap -8.25 -0.25 spread (Reporting by Richard Leong Editing by Paul Simao)