* Medium-term debt prices fall in fourth straight session * CME to adjust some bond futures after price spike * Fed buys $1.58 bln in bonds due 2036-43 * Bond market to shut early on Tuesday, close Christmas By Karen Brettell and Richard Leong NEW YORK, Dec 23 (Reuters) - U.S. Treasuries prices slipped on Monday on light volume as medium-term issues weakened for a four straight session due to concerns the Federal Reserve might raise interest rates sooner than it signaled last week if the economy strengthens.
Five-year note yields hit a three-month peak and seven-year yields hovered near their highest level since mid-September as investors exited bets that medium-term yields would stay low. The U.S. central bank said last Wednesday it would reduce the size of its bond purchase program by $10 billion to $75 billion in January.
The Fed, analysts say, aimed to mitigate the tapering of its year-old stimulus program with a commitment to keep short-term policy rates near zero if unemployment were to stay high and inflation were stuck below its 2 percent target.
This "forward guidance," however, was not as dovish as some traders had hoped. It subsequently stoked a wave of selling in intermediate maturities but spurred some buying of long-dated issues because the policy shift suggests the Fed is taking steps to curb long-term inflation by paring its stimulus sooner rather than later, analysts said.
The 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 market continues to adjust in a post-tapering environment. The market is looking at forward guidance as not having a lot of credibility. It is pricing in rate hikes sooner even as the Fed's forecast is going the other way," said Robert Tipp, chief investment strategist with Prudential Fixed Income in Newark, New Jersey, which has about $400 billion in assets.
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 at the narrowest level since September at 2.15 percent late Monday.
About a month ago, this part of the yield curve was as wide or steep as 2.55 percent, prior to a spate of encouraging economic data, including an upbeat November payrolls report.
"There was some poor positioning. People thought the curve would steepen out and you've seen some unwinds of the steepening trade, which has hurt the belly," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.
Data released on Monday showed U.S. consumer sentiment hit a five-month high heading into the end of the year and spending notched its strongest month since the summer.
On the open market, five-year Treasury notes last traded down 3/32 in price to yield 1.690 percent, up 2.0 basis points from late on Friday. The five-year yield traded up to 1.744 percent earlier, which was the highest level since Sept. 13, according to Reuters data.
The 30-year bond fell 11/32 in price, yielding 3.845 percent, up 2 basis points from Friday's close. Since the Fed's tapering decision, the 30-year yield has fallen about 10 basis points.
Losses on the long bond were mitigated by the Fed's latest purchase of this maturity on Monday. The central bank bought $1.58 billion in bonds due 2036 and 2043 in its only buy-back this week.
Benchmark 10-year Treasury notes fell 11/32 in price to yield 2.926 percent, up 4 basis points from late on Friday.
Monday's Treasuries trading volume was about 17 percent below its 30-year average, according to Tradeweb.
The bond market will stop trading early on Tuesday at 2 p.m. (1900 GMT), and will be closed Wednesday for Christmas.
Meanwhile, the largest U.S. futures exchange operator, CME Group Inc. said on Monday it would adjust the price for some March 14 bond futures trades after the contracts were subject to an unusual price spike in overnight trading.
The futures move caused a corresponding plunge in 30-year bond yields, which fell as much as 40 basis points to around 3.50 percent, according to some price indications. The yields quickly recovered and were last trading at 3.83 percent.
Analysts and traders said these erroneous trades did not appear to cause any lasting disruption to bond futures trading this session. It was unclear how they might have affected the cash market during the period between when the trades went through and CME adjusted the price.
- Bond market