* Deal to avert "fiscal cliff" spurs risk-on trade * Benchmark yields climb to highest since mid-Sept * Worries over debt ceiling seen containing selloff By Chris Reese NEW YORK, Jan 2 U.S. benchmark 10-year Treasury yields hit a more than three-month high on Wednesday after lawmakers approved a deal that prevented a round of automatic budget cuts and tax hikes that could have tipped the world's largest economy into recession. The Republican-controlled House of Representatives approved a bill late on Tuesday that will raise taxes on top earners, avoiding a "fiscal cliff" of $600 billion in higher taxes and decreased spending. Relieved investors dumped safe haven assets such as U.S. government debt to pour money into higher-yielding, riskier instruments such as equities. The passage of the budget deal sparked "a substantial risk-on move that has Treasuries on the back foot," said John Briggs, Treasury strategist at RBS Securities in Stamford, Connecticut. Benchmark 10-year Treasuries were trading down 23/32 in price to yield 1.837 percent, up from 1.76 percent late Monday. Yields touched 1.86 percent on Wednesday, the highest level since mid-September. Thirty-year Treasury bonds were trading 1-21/32 lower in price to yield 3.039 percent, up from 2.95 percent late Monday. Bond yields were at 3.06 percent early in the session, also the highest since mid-September. Yields may rise further if data, including the closely watched jobs report for December due out on Friday, show the U.S. economy is improving. The bearish tone in Treasuries on Wednesday was supported by data from the Institute for Supply Management showing U.S. manufacturing expanded slightly last month after an unexpected contraction in November. "Even with all the negative headlines surrounding the fiscal cliff, we still managed to improve on the month, and this shows the underlying resilience of manufacturing, which continues to add modestly to the economy over the course of the year," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. However, analysts said a massive risk-on selloff in U.S. debt was unlikely. In addition to further fiscal tightening, lawmakers must still agree over the next few weeks on raising the government's borrowing limit. "Higher tax rates will bring slower growth going forward, and (investors) view the recent selloff as a decent opportunity to add duration," said Tom di Galoma, managing director at Navigate Advisors LLC in Stamford, Connecticut. The Federal Reserve's loose monetary policy is also expected to keep yields relatively subdued for a long period, especially on short-dated paper.