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

* Benchmark yields hold close to three-month highs

* Yield curve stabilizes after flattening on Fed tapering

* Durable goods orders grew more than forecast in November

* 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 the timing 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 10/32 in price to yield 2.964 percent, up more

than 3 basis points from late on Monday. The 10-year yield was 4

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

Thirty-year bonds declined 21/32 in price,

yielding 3.881 percent, up about 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,

widened to 2.16 percent from Monday's 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 hike 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 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 hike 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.