December 30, 2016 / 3:27 PM / 8 months ago

TREASURIES-Yields little changed as bonds end volatile year on quiet note

* Yields little changed from Thursday levels

* Treasuries on pace for woeful fourth quarter

* Treasuries lag other bond classes in 2016

By Dion Rabouin

NEW YORK, Dec 30 (Reuters) - U.S. Treasuries were little changed across the curve on Friday in thin pre-holiday trading, ending a weak fourth quarter and rounding out a year of surprises with minimal fanfare.

Treasury bonds were the worst performing fixed-income asset this year by a wide margin, vastly underperforming both U.S. investment grade and high-yield corporate bonds and federally backed mortgage securities.

Benchmark 10-year Treasury notes were flat to yield 2.481 percent, less than 1 basis point changed from their late Thursday levels.

With only a truncated pre-New Year's session to go, the fourth quarter was on pace to be the poorest Treasuries have performed in the history of the Merrill Lynch Treasury index, with a -4.175 percent return. A comparable measure from Bloomberg Barclays indexes showed Treasuries on track for their worst performance since 1980.

The selloff during the year's final quarter was due largely to the election of Donald Trump as U.S. president, analysts said, and the expectation of looser fiscal policy and rising interest rates based on his campaign promises of increased infrastructure spending and tax cuts.

"The election changed everything," said Bryce Doty, senior vice president and portfolio manager at Sit Investment Associates Inc, in Minneapolis. "People went from being fairly pessimistic on the economy - slow growth, stagnant environment - to a very pro-business, pro-economic growth (environment). That's very good for corporate bonds."

Additionally, such an environment is negative for Treasuries, Doty said.

"Investors required less yield over Treasuries as they viewed lower-rated corporations as less risky to default, so Treasuries were left behind," he said. "Treasuries don't offer much yield, a lot of volatility and are going to do poorly if the Fed starts raising rates at a quicker pace."

Treasuries showed a less than 1-percent return for all of 2016, according to Merrill Lynch's Treasury index, while U.S. corporate bonds returned 5.71 percent and high-yield bonds delivered a 17.44-percent return.

Despite the minimal overall return, analysts described 2016's Treasury market as "crazy," "volatile" and "overwhelming."

"From a whole year perspective if I had to classify this year as something, I would classify 2016 as the year of surprises," said Jennifer Vail, head of fixed-income research for US Bank Wealth Management in Portland.

For the year, 10-year Treasury yields rose 30 basis points, according to Reuters data. Yields on the 10-year note fell to as low as 1.32 percent after Britain's surprise vote to exit the European Union and rose to as high as 2.64 percent in the days following the U.S. election.

"Rates are not significantly changed from this time a year ago," said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald in New York. "But there was a lot of action that took place in the 366 days."

Reporting by Dion Rabouin in New York; Editing by Nick Zieminski

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