NEW YORK (CNN/Money) - U.S. Treasurys staged a powerful rally Friday afternoon, forcing short-term yields to record lows, as investors worried about sluggish economic data fled stocks in favor of bonds.

Around 12:20 p.m. ET, the two-year note jumped 8/32 of a point to 100-15/32, taking its yield down to 2 percent for the first time, breaking through last week's record intraday trough of 2.02 percent. The five-year note surged 18/32 to 105-02/32 to yield 3.22 percent.

The benchmark 10-year note gained 24/32 to 104-15/32, while its yield dropped to 4.29 percent, while the 30-year bond added 19/32 to 101-28/32, yielding 5.24 percent.

The U.S. unemployment rate held steady at 5.9 percent in July while the economy added just 6,000 jobs, well below expectations, reflecting a labor market still struggling to recover from a recession that led to more than 1.5 million job cuts last year.

Employers added 6,000 jobs to payrolls in July after adding a revised 66,000 jobs in June, the Labor Department reported. Economists surveyed by Briefing.com had forecast an unemployment rate of 5.9 percent and 60,000 new jobs.

Separately, the Commerce Department reported that personal income rose 0.6 percent in June after rising a revised 0.4 percent in May, and personal spending rose 0.5 percent after falling 0.1 percent in May.

"This report kind of confirms the market's fears that the economy is limping around on just one foot," said Anthony Chan, chief economist at Banc One Investment Advisors. "At same time, I don't think this report is telling us we're moving toward a recession."

Bond market traders said the weakness in equities, combined with renewed concerns about the weak report on second-quarter economic growth and Friday's weak employment report, had hastened investors' flight to the perceived safety of Treasury bonds.

"We've seen huge fund buying of bonds and eurodollars; curve steepening trades are all the rage and everyone's talking double-dip recession," said a trader at a U.S. primary dealer. "But when the whole market's facing one way there's always a risk something can sneak up behind, like a rogue jobs number," he warned.

U.S. investors, reeling from a beaten-down stock market, have pulled $18.05 billion from stock mutual funds in June, according to an industry trade group.

Traders were betting that the recent signs of economic weakness might force the Federal Reserve to cut its target for short-term interest rates again as the central bank tries to prop up the sluggish economy.

Tony Crescenzi, bond strategist at Miller, Tabak & Co, said there were even rumors in the market Friday about a possible coordinated interest rate cut from the Federal Reserve and the European Central Bank.

Such was the air of gloom over the economy that Thursday's upbeat news on auto sales was all but ignored. Since auto sales comprise around 25 percent of retail sales, that would seem to translate into a rise of around 3.0 percent in retail sales for July before any other goods were included.

In the currency market, the dollar fell across the board Friday on a soft U.S. jobs report after a slew of sluggish economic data in recent days cast doubt on the pace of the U.S. recovery.

Around 12:20 p.m. ET, the euro bought 98.81 U.S. cents, up from 98.36 cents late Thursday, while the dollar bought ¥118.98, down from ¥119.28 late Thursday.

After tracking global equity markets higher at the start of the week, the dollar resumed its downward path Thursday as a shock slide in a key U.S. manufacturing index fueled concern the economy could slow down again in the second half of the year.

"The market is now highly sensitive to weak economic data and has already started to position for a disappointing U.S. jobs report," said Ian Stannard, currency strategist at BNP Paribas.  

-- from staff and wire reports