TREASURIES-Bonds gain as consumer sentiment sags

(Updates prices, adds comment, adds byline)

* Weak consumer sentiment data boosts bonds

* Earlier housing starts rebound forgotten

* Year-end U.S. rate hike still priced in

By John Parry

NEW YORK, May 16 (Reuters) - Treasury debt prices rose on Friday after a surprisingly weak sentiment reading reawakened fears that consumer spending could slide.

Earlier an apparent glimpse of hope in the crumbling housing market had dealt bonds a brief blow, but concern over the economy grew again with release of the confidence data. Stocks also fell, adding to the bid for safe haven government bonds.

"The Treasury market right now has a very, very good bid," said John Spinello, Treasury bond strategist with Jefferies & Co. in New York. "The consumer confidence number accelerates concerns about spending, with markets somewhat ignoring the inflation expectations."

The Reuters/University of Michigan survey showed that U.S. consumer sentiment fell to its lowest in nearly three decades. But inflation expectations within the report edged up. The longer maturities initially did not react, apparently on the view that soaring food and gasoline costs would mostly crimp economic activity. U.S. crude oil surged to new records above $127 per barrel.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 7/32 for a yield of 3.79 percent US10YT=RR, versus 3.82 percent late Thursday.

Bond traders reacted to signs of more weakness in non-farm payrolls in April based on a state-by-state breakdown of changes for last month the Bureau of Labor Statistics released on Friday. The perception the labor market was struggling more than previously thought drove more of a bid into bonds, analysts said.

Earlier, the biggest monthly jump in housing starts in two years hinted that the housing market might not be crumbling as much as expected, taking bond traders by surprise.

Yet analysts remained skeptical since this single report on breaking ground to build new homes might be an aberration and is unlikely to signal a bottom to the steady slide in house prices.

U.S. interest rate futures shifted slightly to increase the implied chance of a June interest rate cut. But futures still showed that most market participants expect a 25-basis-point rate hike for the end of the year.

The two-year Treasury note's price was up 1/32. The yield declined to 2.42 percent US2YT=RR, compared with 2.43 percent late Thursday.

"We have noticed over the past couple of days that two-year yields above 2.50 percent have tended to draw in buyers," said Josh Stiles, bond strategist and managing director with research consultancy IDEAglobal in New York.