TREASURIES-U.S. bond prices fall in light pre-Christmas trade

* Two-year, 10-year yields close to three-month highs

* Durable goods orders grew more than forecast in November

* Nov new homes sales dipped, prior months revised higher

* U.S. bond trading to end early, to close Christmas Day

By Richard Leong

NEW YORK, Dec 24 (Reuters) - U.S. Treasuries prices fell on

Tuesday with benchmark yields hovering near three-month highs as

investors trimmed their bond holdings ahead of a shortened

session before Christmas.

The bond market will stop trading early at 2 p.m. EST (Other OTC: ECPCY - news) (1900

GMT), and will be closed Wednesday.

Worries over when the Federal Reserve might raise short-term

interest rates after it stops buying bonds have bogged down the

market, especially among medium-term issues.

A stronger-than-expected report on durable goods orders

supported the view the U.S. economy might be gathering some

momentum into early 2014, raising the risk the U.S. central bank

would accelerate its reduction of bond purchases.

The news durables goods rose 3.5 percent last month spurred

selling in longer-dated Treasuries, which the Fed has targeted

to hold down mortgage rates and other long-term borrowing costs

to stimulate the economy.

"The path of least resistance right now is lower bond prices

and higher yields," said John Brady, managing director of

interest rate futures sales at R.J. O'Brien and Associates in

Chicago.

On light trading volume, benchmark 10-year Treasury notes

fell 12/32 in price to yield 2.970 percent, up 4

basis points from late on Monday. The 10-year yield was 3 basis

points short of the two-year high set in September.

The yield on two-year notes was last 0.395

percent after hitting a three-month high at 0.399 percent

earlier.

Thirty-year bonds declined 24/32 in price,

yielding 3.887 percent, up 4 basis points from late on Monday.

The yield gap between five-year and 30-year

Treasuries, which is seen as gauge of traders' view on changes

in the Fed's interest rate policy and its bond purchase program,

held for a third straight session near 2.15 percent, which was

its tightest level since September.

A sharp narrowing of the yield differences between medium-

and long-dated Treasuries since last week signaled a combination

of worries about a rate increase not too long after the Fed ends

its purchase program and doubts about the Fed's communication as

an effective policy tool.

The Fed said last Wednesday it will pare its monthly

purchases of Treasuries and mortgage-backed securities in

January by $10 billion to $75 billion.

Through a statement released following a two-day policy

meeting, the Fed aimed to mitigate its tapering of the bond

purchase program with a commitment to keep short-term rates near

zero if unemployment were to stay high and inflation were stuck

below its 2 percent target, analysts said.

"The market is still adjusting to the Fed making a

qualitative change rather than a quantitative change in their

policy thresholds which would have been easier for the market to

digest," said Vishal Khanduja, portfolio manager at Calvert

Investments in Bethesda, Maryland.

The futures market, however, continued to signal traders'

anxiety about the Fed possibly raising policy rates earlier than

what it suggested last week.

Federal funds futures implied traders are pricing in a 56

percent chance of a rate rise in June 2015, up from 54 percent

on Monday and 39 percent a month ago, according to CME Group (Kuala Lumpur: 7018.KL - news) 's

FedWatch, which computes traders' expectations of the fed funds

rate that the Fed influences through monetary policy.

The rise in bond yields has raised home finance costs,

reducing mortgage activity in the latest week.

The Mortgage Bankers Association said on Tuesday its index

on weekly application activity fell 6.3 percent to the lowest

level in 13 years as the average interest rate on 30-year

mortgages edged up to its highest level in three months.

The housing recovery was disrupted by a jump in mortgage

rates this past summer, but it has shown signs of regaining

footing in recent months. New home sales slowed to an annualized

pace of 464,000 in November from an upwardly revised 474,000

pace in October, which was the strongest since July 2008.