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* Yields fall for third straight day
* Treasuries on pace for woeful fourth quarter
* Treasuries lag other bond classes in 2016 (Recasts with U.S. afternoon trading, adds data, quotes)
By Dion Rabouin
NEW YORK, Dec 30 (Reuters) - U.S. Treasury debt yields closed lower on Friday in a shortened session, falling for the third straight day to end a weak fourth quarter with a modest consolidation and round out a year of surprises.
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 rose 8/32 in price to yield 2.446 percent.
With only Friday's truncated pre-New Year's session left to count, the fourth quarter looks to be the poorest Treasuries have performed in the history of the Merrill Lynch Treasury index, with a minus 4 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.
"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," he said.
Treasuries were set to return 1 percent for all of 2016, according to Merrill Lynch's Treasury index, while U.S. corporate bonds returned just under 6 percent and high-yield bonds delivered more than 17 percent.
Despite the minimal overall return, analysts described 2016's Treasury market as "crazy," "volatile" and "overwhelming."
"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 17 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.
For next year, analysts said they expect bonds to have a solid year. A number of investors told Reuters the post-election rally had been overdone and they're expecting to see further pullback in yields.
"If anything, optimism on the economy is running too high," said Robert Tipp, chief investment strategist at Prudential in Newark, New Jersey. "The increase in yields here has set the market up for a pretty good 2017."
Reporting by Dion Rabouin in New York; Editing by Nick Zieminski and Lisa Shumaker