* Bets on Fed rate rise rose before last Friday’s job data

* Net shorts in two-year T-note futures most since Oct 2014

* Shorts stampeded to cover after jobs data

* Yellen does little to help short positions on Monday

By Richard Leong

NEW YORK, June 6 (Reuters) - It has been a rough couple of days for Treasuries’ bears, as a massive buildup of bets against U.S. government debt first got bowled over by a surprisingly weak Labor Department jobs report on Friday and then Federal Reserve Chair Janet Yellen did little to soften the pain in a speech on Monday.

In the days leading up to the publication of the May U.S. employment data last Friday, hedge funds and other big speculators heeded recent advice from Yellen and other Fed officials who had suggested the U.S. economy was strong enough to absorb another interest rate increase soon.

Fed rate hikes are bearish for Treasury debt prices, so investors ramped up short positions in U.S. Treasury futures contracts in anticipation that bond prices would drop.

In CME 2-year note futures alone, the net short positioning as of May 31 was the largest since May 2007, with some 192,797 contracts nominally worth $38.6 billion, according to the latest Commitments of Traders report from the Commodity Futures Trading Commission.

Bets on a pending interest rate increase were even more massive in the CME Eurodollar futures, which are used to estimate future interbank lending rates. Eurodollar net shorts grew to 816,960 last week, which was the most since October 2014, the CFTC data showed.

Two-year T-notes and Eurodollar futures are more sensitive to changes to traders’ view on Fed’s rate moves than longer-dated Treasuries.

SHORTS STAMPEDE

After the May U.S. jobs data was reported on Friday, casting doubt on the need for an imminent interest rate rise, Treasury prices jumped and their yields dropped, souring short bond bets. As losses grew, there was a stampede to close out short positions.

The Labor Department said U.S. employers added only 38,000 workers in May, far fewer than the 164,000 forecast among economists polled by Reuters. March and April payrolls increases were revised lower, sharply reducing expectations of a looming interest rate hike.

Bond prices surged, in no small part on a frantic exodus from the large short bets.

Two-year Treasury yield tumbled to 0.7840 percent on Friday, down nearly 11 basis points for its steepest one-day decline since Sept 17, 2015.

Eurodollar futures soared that day also with those for December 2018 delivery rising 16.5 basis points which was their biggest single-day gain since Oct. 15, 2014.

Open interest on two-year T-notes and Eurodollar futures fell sharply on Friday, suggesting the rally represented traders exiting short positions. Two-year T-note and Eurodollar futures open interest fell by 14,899 and 71,704 contracts, respectively, according to the CME Group.

“They were bulled up for a strong jobs report. They ended up getting anything but,” said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.

“You got a huge shortcovering rally,” Goldberg said.

COME MONDAY

On Monday, in a speech in Philadelphia, Yellen also did little to revive last week’s speculation of a rate rise at the Fed’s policy meeting next week on June 14-15.

Yellen again said she believes a gradual path of rate hikes would be appropriate, but made no reference to a time frame and cautioned that Friday’s jobs report bears watching.

“As for a June rate hike, the market has almost erased that as an idea,” said Alex Manzara, vice president of institutional sales at R.J. O’Brien and Associates in Chicago.

After Yellen’s Monday speech, U.S. Treasuries’ prices reversed some of Friday’s rally given the Fed Chair again said a strengthening economy means that interest rate increases are likely on the way, despite acknowledging Friday’s disappointing employment report.

“Positive economic forces have outweighed the negative” for the U.S. now that risks from earlier this year have diminished, Yellen said.

In her public comments, the last by any U.S. central banker before next week’s meeting on rates, Yellen said last month’s jobs report was disappointing and bears watching, but she warned against attaching too much significance to it on its own.

“She was probably not as dovish as feared,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. “She was very balanced.”

On Monday, benchmark Treasury 10-year notes ended down 6/32 in price to yield 1.723 percent, up from a two-month low of 1.697 percent on Friday.

The U.S. Treasury two year note fell 1/32 to yield 0.795 percent.

“The mixed message today suggests that Yellen is disinclined to move forward and take the next step in the normalization process in the near-term, but it also does not shut the door on the prospects for a July rate either,” said Thomas Simons, a money market economist at Jefferies in New York.