US 2-year hits record low as Fed funds futures price in negative rates

• The US two-year yield drops to lowest on record.
• Fed funds futures price in negative rates by January 2021.

The yield on the two-year US Treasury note fell to a record low of 0.115% during Thursday's US trading hours after the data showed continued deterioration of the labor market due to the coronavirus pandemic. 

Almost 3.2 million applied for unemployment benefits in the week ended May 2, the official data showed. Over the last seven weeks, some 33 million workers have been rendered jobless. The unprecedented joblessness has boosted fears of a prolonged economic downturn in the US economy and forced investors to price in the prospects of the Federal Reserve reducing rates to levels below zero in the near future. 

According to Bloomberg Quint, the price of January 2021 federal funds futures topped 100 on Thursday, signifying traders expect the Fed to further drop the target range from 0%-0.25%.

The odds that the Fed would push rates below zero would further strengthen if the Nonfarm payrolls data shows a bigger-than-expected decline in jobs in April. In that case, the two-year yield will likely fall into single digits. At press time, the two-year yield is seen at 0.14%.