Bond prices jump on aggressive rate cut hopes

By Lucia Mutikani

NEW YORK (Reuters) - Government bond prices rose on Monday, pushing short-dated yields to two-year lows on optimism the Federal Reserve would aggressively cut interest rates next week.

Wall Street stocks ended little changed.

Treasuries extended Friday's hefty gains triggered by an unexpected drop in nonfarm payrolls, with the 30-year bond rallying more than a full point in price.

August's jobs report left traders certain the Fed would cut the benchmark overnight lending rate at its September 18 meeting, with a growing chorus now expecting the federal funds rate target to be lowered by 50 basis points to 4.75 percent.

"People are coming to the view that ... perhaps 50 basis points is not out of the question," said Wan-Chong Kung, senior fixed income portfolio manager at First American Funds in Minneapolis.

In late New York trade, benchmark 10-year notes traded 14/32 higher in price for a yield of 4.33 percent, versus 4.39 percent late on Friday. Yields, which move inversely to prices, earlier fell as far as 4.30 percent -- the lowest since early 2006.

Two-year notes, the most sensitive to changing views on Fed interest rate policy, were up 3/32 to yield 3.85 percent. Yields briefly dropped to 3.82 percent, a level not seen since late 2005.

Two-year yields have fallen nearly 75 basis points since the end of July.