Two-year Treasury yields at record low as stocks fall

LONDON (Reuters) - Two-year U.S. Treasury yields hit a record low on Tuesday and futures rallied to their highest since April 2009 as weak Asian stock performance and euro zone banking worries fueled a bid for the safety of U.S. debt.

Treasury yields fell across the curve, pushing through key resistance levels in the 10-year maturity, where yields passed below 3 percent, with traders citing a slide in Chinese stocks as a major trigger.

"If you look at the Chinese stock market, it looks particularly ugly, and China has a tendency to lead in the 'rest-of-the-world' category," said a trader in London.

Shanghai shares slid by over 4 percent as investors sold existing stocks to make room for Agricultural Bank of China's ABC.UL initial public offering.

In Europe the FTSEurofirst index of top European shares lost around 1.9 percent, with euro zone bank funding worries ahead of the repayment of 442 billion of European Central Bank emergency loans adding to concerns.

"A lot of (negative sentiment) is still emanating from concerns over Europe and the European banking system and the impact that might have if it rolls out globally," said David Page, economist at Investec.

The expiry of the ECB funding later this week has caused markets to adopt a cautious stance, wary of the effect that the large liquidity drain will have on the performance of peripheral euro zone debt.

RECOVERY DOUBTS

U.S. stock futures also pointed to a lower open on Wall Street.

Traders reported strong cash buying from Asian investors in the two to five year sector of the curve, with Treasury futures volumes also high.

At 1000 GMT, 10-year Treasury futures were 16/32 higher at 122-41/64, the highest since mid April 2009.

Two-year yields were 0.6093 percent, having reached a record low of 0.594 percent earlier in the session. Ten-year yields fell below 3 percent for the first time in 14 months, and were last at 2.9652 percent -- nearly six bps lower on the day.

With key U.S. employment data due on Friday, focus was also on the strength of recovery in the world's largest economy after a run of weak data releases.

The rally in Treasury futures lost some momentum in European trading, but strong demand saw the contract remain at elevated levels.

"We've hit a Fibonacci extension level this morning at 122-23/32, so that is a resistance point, but if we look at the momentum trending aspects everything is still pointing to higher prices and lower yields," said Richard Adcock, technical anlayst at UBS in London.

The next target lower for 10-year yields was the late April 2009 low of 2.79 percent, which could be breached in coming weeks, Adcock said.

(Editing by Patrick Graham)