By Cordell Eddings and Daniel Kruger Aug. 6 (Bloomberg) -- Treasury two-year note yields dropped below 0.50 percent for the first time after the government said the economy lost more jobs in July than economists forecast. Bonds were headed for a weekly rally as hiring by private employers trailed estimates from analysts, encouraging speculation that a stalled economic recovery may force the Federal Reserve to provide more stimulus. Bill Gross of Pacific Investment Management Co. said a plunge in two-year yields indicates investors should buy longer-maturity securities. “The markets are correct to be pessimistic about economic growth going forward,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York. “We’ll continue to set new lows on two-year yields for the next month or so.” The yield on the 10-year note decreased five basis points, or 0.05 percentage point, to 2.85 percent at 9:40 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 climbed 14/32, or $4.38 per $1,000 face amount, to 105 15/32. The two-year note yield slid two basis points to 0.51 percent after falling to the all-time low of 0.4977 percent. The 10-year note yield touched 2.8398 percent, the lowest level since April 2009. The 30-year bond yield decreased three basis points to 4.02 percent. The extra yield investors demand to hold 10-year notes instead of 2-year debt dropped two basis points to 235 basis points. It fell to 227.5 basis points on July 1, reflecting the flattest yield curve since October. Fed Rate View Futures on the CME Group Inc. exchange showed a 32 percent chance the Fed will raise its target rate for overnight lending between banks at least a quarter-percentage point by the August 2011 meeting, compared with 49 percent odds a week ago. Gross, founder and co-chief investment officer at Newport Beach, California-based Pimco, said in a radio interview today with Tom Keene on “Bloomberg Surveillance” that the central bank is on hold “for a long, long time.” St. Louis Fed President James Bullard wrote in a paper released last week that the central bank should resume purchases of Treasuries if the economy slows and prices fall. Philadelphia Fed President Charles Plosser said in a Bloomberg News interview that calls for more Fed stimulus are premature. The Fed has maintained a range of zero to 0.25 percent for its benchmark rate since December 2008 to encourage the economic recovery. Policy makers meet next week on Aug. 10. Slower U.S. Growth U.S. economic growth slowed to a 2.4 percent annual rate in the second quarter from a 3.7 percent pace in the first three months of the year. Consumer spending, pending home resales and factory orders were weaker in June than projected. Non-farm U.S. payrolls lost 131,000 positions in July after a revised reduction of 221,000 in the previous month, the Labor Department reported today. The median forecast of 84 economists in a Bloomberg News survey was for a reduction of 65,000. The unemployment rate stayed at 9.5 percent. Private payrolls excluding government rose by 71,000 after a June gain of 31,000 that was smaller than previously reported. Economists projected a 90,000 increase in July. Benchmark 10-year note yields rose on five of the past seven announcements of non-farm payrolls figures. The yields fell 4 basis points on Feb. 5, when the government announced unexpected job losses, and dropped 16 basis points on June 4, when the report showed employers added fewer jobs than economists forecast. The 10-year note yield will climb to 3.32 percent by year- end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent estimates given the heaviest weightings. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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