Government bond prices rebounded on Wednesday on short-covering, but benchmark yields stayed near five-year highs as strong economic data raised the prospect that the Federal Reserve may increase interest rates.

A slight moderation in selling by mortgage players, partly blamed for the recent rout that pushed yields up 30 basis points in a week, was also contributing to the recovery in Treasuries, analysts said. But they added that the market remained edgy.

Short-sellers, who bet on falling prices, bought back bonds and took profits after strong data on consumer spending failed to boost yields to new multiyear highs, analysts said.

A lot of it is due to short-covering and position-squaring before the real data comes out at the end of the week, said Beth Malloy, bond market analyst at Briefing.com in Chicago.

Benchmark 10-year Treasury notes were up 16/32 in price for a yield of 5.22 percent, down 7 basis points from late Tuesday. In earlier European trade, 10-year yields strayed as high as 5.33 percent, their highest in five years.

Treasuries have been hammered by worries that strong global demand will force central banks to raise interest rates, as well as by selling from mortgage players in a move to shed their duration risk after yields jumped above 5 percent.

Right now, the conventional wisdom would have you believe we have flushed that mortgage-related selling out as well. There doesn't need to be a convexity play ... to push Treasury yields to 6 percent, said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York.

Investors have surrendered hopes the Federal Reserve will cut interest rates this year and prospects of monetary policy tightening are increasing.

A government report showed that U.S. retail sales in May grew at their strongest pace since early 2006, much faster than analysts had expected, while import prices climbed 0.9 percent last month, three times the consensus increase forecast by economists polled by Reuters.

The latest data supported the view that U.S. growth may be picking up despite a protracted housing slowdown.

This is just another brick in the wall as far as data that shows the global economy is surging. It is hard to find a weak data point in the reports, said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York.

Short-term U.S. rate futures were weaker and suggested that traders are pricing in the chance that the Fed may raise rates by the end of the year. Just a month ago, rate futures were suggesting a Fed rate cut.

Two-year notes, which are most sensitive to traders' views on Fed policy, were up 2/32 in price to yield 5.07 percent, down from 5.11 percent late Tuesday.

Five-year Treasuries were up 7/32 in price for a 5.15 percent yield, down 4 basis points from late Tuesday, while the long bond was up 1-15/32 in price to yield 5.29 percent, versus 5.40 percent late Tuesday.

The Fed will publish at 2 p.m. (1800 GMT) its Beige Book, which will offer a snapshot of the Fed's latest assessment of the regional economic conditions.

New York Morgan Stanley