* Fed's brighter outlook for US economy hits prices * Good results on bank stress tests weaken safety bid * 30-year bond auction met with average demand By Chris Reese NEW YORK, March 14 (Reuters) - U.S. Treasuries prices plunged on Wednesday, sending yields to the highest level since October as the Federal Reserve's brighter economic outlook and recent stock market strength drove investors out of U.S. government debt for a second day. The surge in yields raised questions about the possible end to a long, steady Treasuries rally that has been driven by the euro zone debt crisis and a U.S. economy that has struggled with historically high unemployment. Mostly positive stress test results for the U.S. banking sector, announced by the Fed late Tuesday afternoon, also undermined the Treasury market's safe-haven appeal. Treasuries extended losses following the auction of $13 billion of reopened 30-year bonds. The sale was met with about average demand, although many market players had been looking for a stronger appetite for the debt. Yields rose above some technical milestones, with the five-year through 30-year yields passing their 200-day moving averages, which could signal further selling may be in store. A degree of optimism in the Fed's policy statement on Tuesday pushed the long end of the Treasury curve through support at 3.25 percent. The 30-year Treasury bond on Wednesday traded down 2-23/32 in price to yield 3.42 percent, up from 3.27 percent late Wednesday. The benchmark 10-year Treasury note traded 1-13/32 lower in price to yield 2.28 percent, the highest since October 31 and up from 2.13 percent late Tuesday. Yields had the biggest two-day rise since October, putting some room between the 1.67 percent mark reached in September, which was the lowest in at least 60 years. Treasury rates have risen on better economic data and improved sentiment, along with the mostly positive results from stress tests of the banking sector, said Tom Chow, senior vice president and portfolio manager at Philadelphia-based Delaware Investments, with $150 billion in assets under management. Simultaneously, "there's still abundant cash to be put to work in risk sectors and additional proceeds may come from redeployment from 'risk-free' sectors like Treasuries," he said. The Fed said that 15 of the 19 banks it tested would have enough capital to protect against losses, even in the event of a severe financial shock. The stress tests give a window into the health of the U.S. banking industry. [ID:nL2E8EDK4 ] On Wall Street, stocks were mostly flat, taking a breather after a five-day advance. "Equities are getting the message that they are cheap relative to bonds, which is the other side of bonds getting the message that they are extremely expensive," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York. Some even argued the Fed could raise interest rates next year, although the Fed has continued to say it would keep its federal funds rate exceptionally low at least through late 2014. "Our guess is the economy continues to do well and (the Fed will) raise rates sometime early in 2013," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. Against such a backdrop, the market's reaction to the Fed "makes sense," said Jonathan Lewis, chief investment officer at Samson Capital Advisors in New York. "We're seeing a bear steepener where shorter maturities are holding in much better than longer ones, because the Fed reiterated that the short end of the curve is safe to be in," he said, referring to the Fed's pledge on ultra-low rates. In contrast, inflation and growth expectations could drive the long end of the curve, Lewis said. The Fed's observation that the economy has been expanding and that labor market conditions have improved "reinforced the model for the bond market that better data means good equity market performance; when risk assets like equities perform well, it's a bear steepener, so sell the long end," he said. However, with the Fed expected to hold interest rates near zero for the immediate future, some analysts did not see a lot of room for yields to zoom much higher. "We expect short-term real interest rates in the U.S. to remain close to zero, at least for the next year or so," said Julian Jessop, chief global economist at Capital Economics in London, adding "this, in turn, is likely to keep long-term real yields firmly anchored." "U.S. Treasury yields will rise sharply at some point once the markets start to expect monetary policy to return to more normal settings, but that point is probably still a long way off," Jessop said. The reopened 30-year bonds auction on Wednesday brought a high yield of 3.383 percent, which was the highest since August. Sales of $21 billion of reopened 10-year notes on Tuesday and $32 billion of three-year notes on Monday also brought near average demand.