TREASURIES-Yields rise as equities sell off heading in to New Year

(Updates with midsession trading)

By Matt Tracy

Dec 27 (Reuters) - The benchmark U.S. Treasury yield rose on Friday as equities sold off in an otherwise quiet holiday-shortened week, as investors look to unemployment figures next week for signs of the economy's path in the New Year.

Yields were little changed following the release of business inventory data that fell in line with Reuters polling. Retailers' inventories ticked up in November by 0.3% to $827.5 billion from $825.4 billion the previous month, U.S. Census data on Friday showed. Wholesalers' stocks declined 0.2% to $901.6 billion from $903.8 billion in October.

Another factor in Treasury trading on Friday was a selloff in U.S. equities, according to Jack McIntyre, portfolio manager for global fixed income at asset manager Brandywine Global Investment Management.

The Dow Jones Industrial Average Index was last down 1.13% on the day, while the S&P 500 was down 1.53%.

"It represents a potential wealth transfer effect," McIntyre said. "That could change people's outlook on the economy." A more pessimistic economic outlook could in turn impact appetite for Treasuries, he added.

The yield on the benchmark U.S. 10-year note ticked up 1.2 bps from late Thursday to 4.596%. It hit 4.641% on Thursday, the highest level since May 2, before moderating after a strong seven-year note auction in the afternoon.

The two-year note yield, which typically moves in step with interest rate expectations, was last down 1.9 bps from late on Thursday at 4.311%. It had reached 4.341% in early morning trading.

The 30-year bond yield rose 4.3 basis points to 4.806% from late trading on Thursday.

Tax positioning by investors was likely one factor behind the equities selloff, and could also influence Treasuries trading heading in to the new year, according to Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors.

"The market is thin and volatile," Doty said. "I see both (equities and bonds) disturbed by tax season."

The closely watched gap between yields on two- and 10-year Treasury notes, considered a gauge of growth expectations, was at a positive 29.7 bps, up slightly from 27.1 on Thursday.

Based on the Fed funds futures term structure, traders see minimal chance that the Fed will ease at its January meeting, after delivering its third rate cut earlier this month since the central bank became more accommodative in September.

The implied breakeven inflation rate on 10-year Treasury Inflation Protected Securities (TIPS) fell to 2.347% from 2.362% late on Thursday, indicating the market sees inflation averaging just under 2.35% a year for the next decade.

According to LSEG data, traders do not see another interest rate reduction until May and see a less than 50-50 chance of another 25 basis points from there by year end.

Next week's data releases include pending home sales figures for November on Dec. 30 and the S&P Case-Shiller home price index for last month on Dec. 31. The latest initial jobless claims data will follow on Jan. 2 after the New Year's holiday. (Reporting by Matt Tracy in Washington; Editing by Aurora Ellis and Matthew Lewis)