* Longer-dated U.S. Treasuries yield hits two-year highs * Mortgage-related selling said to extend market rout * U.S. housing starts rise, but consumer sentiment weakens * Fed buys $3.22 billion in debt due 2020-2023 By Richard Leong and Karen Brettell NEW YORK, Aug 16 U.S. Treasuries prices slid on Friday, marking the worst week in two months due to persistent fears the Federal Reserve will pare its bond purchases in September as the economy has showed signs of further improvement. Yields on longer-dated Treasuries hit two-year highs, with the benchmark 10-year yield moving closer to the psychological 3 percent threshold, which some analysts said spurred mortgage companies to reduce Treasuries hedges that soured during this week's yield spike. "It's a further belief that the economy is on a more sustainable path," said Jennifer Vail, head of fixed income at U.S. Bank's wealth management group in Minneapolis. "The market believes that we are closer to the end of not only bond purchases but also the end of near zero interest rate policy." A number of investors that had bet on yield decreases on a summer lull in August, and after the U.S. Treasury ended its near-term supply, have also been stopped out of their positions, which has added to the bond weakness. Investors in the United States and abroad have been curtailing their Treasuries exposure since May 22 when Fed Chairman Ben Bernanke first raised the notion the U.S. central bank might dial back its $85 billion monthly purchases of Treasuries and mortgage-backed securities. The Fed bought $3.22 billion in notes due from 2020 to 2023 on Friday as part of its third round of quantitative easing. The benchmark 10-year yield has risen from about 1.6 percent at the start of May, while the yields on some mortgage-backed securities have increased some 1.80 points, lifting interest rates on 30-year mortgages to two-years highs. The surge in mortgage rates and other long-term borrowing costs raised concerns that higher rates would hurt the housing recovery and end up forcing the Fed to abandon its plan to shrink its bond purchases later this year. But while rising interest rates have shown early signs of bogging down consumer confidence, they are not high enough yet to dent housing activity. "It hasn't reached a level that's problematic yet," Vail said. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on U.S. consumer sentiment slipped to 80.0 from July's six-year high of 85.1. The Commerce Department reported housing starts rose 5.9 percent to an annual rate of 896,000 units, slightly below forecast. On the open market, benchmark 10-year Treasury notes last traded 18/32 lower in price with a yield of 2.832 percent, up 6.7 basis points from late on Thursday. On moderate trading volume, the 10-year yield reached as high as 2.866 percent, a level not seen since July 29, 2011, according to Reuters data. For the week, the 10-year yield was on track to rise 25 basis points, the biggest weekly rise since mid-June when it posted its largest one-week jump since November 2001. The 30-year bond shed about 1 point in price, yielding 3.868 percent after hitting 3.885 percent earlier, which was the highest since Aug. 4, 2011. In the mortgage-backed securities market, the yield on 30-year 3.0 percent coupon issue backed by loans guaranteed by Fannie Mae rose 15 basis points to 4.06 percent. Treasuries have been roiled, along with German, British and other government bonds, as the United States and euro zone economies appear to have found a more solid footing, increasing expectations that yields will continue their recent rise. "Some of the likelihood of a September taper continues to strengthen, and you've also seen a lot of stable news coming out of the European zone," said Sean Murphy, a Treasuries trader at Societe Generale in New York. "That may provide that window of opportunity for the Fed to start (withdrawing stimulus) in September." A Reuters poll on Wednesday showed that a majority of economists expect the Fed to reduce bond purchases at its Sept. 17-18 policy meeting, with a consensus expecting purchases to be reduced by $15 billion initially. Some analysts said this week's yield rise was overdone. "It's a little high at these levels. We are probably going to float back down," U.S. Bank's Vail said. Looking ahead, investors will scour the minutes of the Fed's July meeting, to be released on Wednesday, for any signs of how soon the Fed may reduce its bond purchases. The most important economic indicator in the coming weeks will be the release of August jobs data on Sept. 6.