In the wake of yet another anemic jobs report, Two-Year Treasury Notes Drop to Record Low Yield.

Treasuries rallied, pushing two-year note yields below 0.50 percent for the first time, after the government’s payrolls report showed the economy lost more jobs in July than economists forecast.

“Everything you look at is much weaker and keeps the same pro-Treasury sentiment,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “There will be much more discussion about another round of quantitative easing.”

The 2-year note yield slid two basis points to 0.51 percent, extending its weekly drop to four basis points, after falling to the all-time low of 0.4977 percent. The 10-year note yield touched 2.8130 percent, the lowest since April 2009. The 5-year note yield dropped seven basis points to 1.50 percent after reaching 1.4851 percent, the lowest since January 2009.

“When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table,” Gross, founder and co-chief investment officer at Newport Beach, California-based Pimco, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “So the extension out on the yield curve is what we’ve been attempting over the past several weeks and the past several months.”

“We now have a combination of a weaker economy, no job growth, no inflation and possibly deflation, and it’s not getting better,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management Corp. in Jersey City, New Jersey. “The market can try to continue to try to find reason why we are not Japan, but if it looks like a duck and quacks like a duck, why isn’t it a duck? Investors should stay long on Treasuries as rates can go even lower on the front and back end of the curve.”

Yield Curve as of 2010-08-06

Curve Watchers Anonymous is once again watching the yield curve. Here are a couple of charts.

The above chart shows today’s reaction to the monthly jobs report: Jobs Decrease by 131,000, Rise by 12,000 Excluding Census; Unemployment Steady at 9.5%; June Revised from -125,000 to -221,000

The following chart shows the yield curve over time.

click on chart for sharper image

The chart depicts weekly closes. 10-year yields did slightly exceed 4% in April but those highs do not show in the above chart. Thus, the decrease in yields is even more dramatic than shown.

Note the huge rally on 5 and 10 year treasuries as compared to the 30-year long bond. It appears as if someone is putting on a long-10 short-30 spread.

If the economic data continues to be poor (and I believe it will be), the low in 10-year yields may not even be in even if the low in the 30-year long bond is in.

Mike “Mish” Shedlock
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