TREASURIES-Edge higher, 2-year yield hits record low

* Two-year yield hits record low of 1.06 percent

* Fed rate cut view lends support

* Slide in Asian stocks, credit concern keep safety bids

By Chikako Mogi

TOKYO, Nov 20 (Reuters) - The two-year U.S. Treasury yield hit a record low on Thursday on market expectations for the Federal Reserve to cut interest rates next month in an attempt to shore up the faltering economy.

Federal Reserve officials have pared their outlook for economic growth through 2009 to minimal levels and are ready to cut interest rates further, minutes of the Fed's Oct. 28-29 meeting released on Wednesday showed.

The Fed expects U.S. growth to contract in the second half of 2008 and the first half of 2009. [ID:nN19340273]

Worries over the economy were compounded by credit jitters fuelled by mounting uncertainty over the fate of the struggling U.S. auto industry, intensifying investors' bid for the safety of government debt securities.

"The market remains supported by the flight-to-quality incentive from investors as they sell risk assets for cash or for safe assets such as Treasuries," said Hideki Hayashi, chief economist at Shinko Securities.

"Shorter-dated bonds and bills are particularly strong, as the Fed expects the U.S. economy to be in recession and is keeping its stance to lower interest rates," he said. "It's a favourable environment for funds to flow into Treasuries."

U.S. interest rate futures show that investors see a roughly 80 percent chance of the Fed slashing interest rates by 50 basis points to 0.50 percent at a policy meeting in December, which would be the lowest since the 1950s FEDWATCH.

The two-year yield hit a record low of 1.060 percent <US2YT=RR> according to Reuters data. After trimming gains, the two-year note was steady in price to yield 1.073 percent, steady from late U.S. trading on Wednesday.

Benchmark 10-year Treasury notes rose 2/32 in price to yield 3.262 percent <US10YT=RR>, down around 8 basis points from late New York trade.

In the stock market, Tokyo's benchmark Nikkei share average slid 6.9 percent .N225.

Data on Wednesday showed the U.S. consumer price index fell 1.0 percent last month, a record drop. [ID:nN18276780]

Investor confidence was also hurt by fears of a rapid deterioration in commercial real estate, which could lead to more write-downs for banks and renewed stress in credit markets. Data showed on Wednesday that October housing starts fell 4.5 percent.  Continued...