Doug Tewell set the previous mark of 129 just last year at the Hualalai Golf Club.
Wayne Levi, who played alongside Watson, posted a 7-under 65 to take second place at 13-under-par 131. Dana Quigley, who is playing in his 263rd consecutive event for which he has been eligible and 249th straight overall, also carded a 65. He was joined in a tie for third place at minus-12 by Gil Morgan (64).
Watson fended off several challenges Saturday while extending his lead. He opened his second round just like his first. The 55-year-old birdied the first and kicked in a two-foot birdie putt at No. 4 to get to minus-10.
The four-time major championship winner on the Champions Tour parred his next two holes and was joined in the lead by Hale Irwin. Watson responded with a two-putt birdie at the seventh to regain first place.
Watson chipped his third shot to the par-5 10th within 2 feet of the cup and kicked that in to get to 12 under. He parred his next two holes and was tied for the lead by Quigley, who eagled the 10th and 14th.
Watson responded strongly as he is wont to do. He drained a 6-foot birdie putt at the 13th. The five-time British Open champion made it two in a row as he two-putted for birdie at the par-5 14th.
'The par-5s have been very kind to me,' said Watson, who has eight birdies on the four par-5s through two rounds. 'I birdied all four again today and when you do that you can play with some freedom.'
The Stanford University alum dropped his second shot within 5 feet to setup birdie at 15. Watson capped a run of four consecutive birdies as he ran in a 12-foot birdie putt at the 16th to move three strokes clear of the field.
Watson capped his round with a pair of pars and has played the first 36 holes without a bogey.
'Without any teeth to the wind today, you're going to shoot some great scores,' Watson said. 'Frankly I didn't putt very well today. That one I made on 16 was the only good putt I stroked all day. I was working on what I was doing Friday and it didn't seem to work very well today. I struggled to make those putts.'
Levi had a solid round of his own, but still lost a stroke to Watson. Levi birdied the par-5 fourth and came back with another birdie at seven. However, he stumbled to a bogey to the eighth to slip back to minus-7.
The 52-year-old bounced back with birdies at nine and 10 to jump to 9 under. Levi, like Watson, ran off four consecutive birdies, but his streak started at the 12th. He closed with three straight pars.
'I started out a little slow,' said Levi. 'I didn't do a whole lot on the front nine, but played well on the back nine. I started hitting the ball close on the back nine.'
Quigley carded three birdies and two back-nine eagles to get within four shots of the lead. Quigley has never had a round over par at this event.
Morgan posted one birdie and one eagle on the front nine before catching fire down the stretch. He ran off four straight birdies from the 12th and closed with a birdie at the last.
Hale Irwin (65), John Jacobs (67) and Craig Stadler (67) are tied for fifth place at 10-under-par 134. D.A. Weibring, Bob Gilder, Mark McNulty and Tom Purtzer are one stroke further back at minus-9.
Fuzzy Zoeller, the defending champion, posted his second straight 68. He stands at 8-under-par 136 and was joined there by Tom Jenkins (67) and Don Pooley (67).