TREASURIES-Surge in Asia, shaky markets rattle investors

By Eric Burroughs

TOKYO, March 7 (Reuters) - U.S. Treasuries surged in Asia on Friday and the two-year yield slid below 1.50 percent as severe strains in financial markets convinced more investors the Federal Reserve will keep slashing interest rates aggressively.

Investors were rattled by funds missing margin calls, Wall Street dealers no long providing credit to some clients, portfolio managers dumping high-quality U.S. mortgage bonds to raise cash and structured finance deals having their ratings cut.

June 10-year T-note futures TYv1 jumped 15.5/32 to 117-8/32 on fairly light volume in Asia of about 32,000 lots.

The mortgage sell-off and worries about the health of the banking system have driven two-year swap spreads <USD2YTS=RR> out by more than 20 basis points in just a week to record levels at 112.5 basis points, near where it was quoted in Asia trade.

Fears that the U.S. economy may already be in a recession have stoked speculation that Friday's payrolls data could show a second month of job losses, even as economists have forecast a 25,000 employment gain in February. Payrolls fell by 17,000 in January.

Talk swirled in Asia that very poor payrolls figures would even lead to an emergency Fed rate cut later in the day.

The latest troubles come as money markets tighten anew as banks hoard funds and others have trouble raising cash as the turn to the second quarter approaches, traders said.

Interest rate futures are pricing in an 80 percent chance of rate cuts totalling 75 basis points this month. The Fed chopped rates by an unusually aggressive 125 basis points in January alone to 3 percent as it tries to stave off a recession.