TREASURIES-Bonds up as Q2 GDP fuels talk of accommodation

* Q2 GDP offers outlook for slow growth, low inflation

* Talk Fed could become more accommodative

* Month-end index buying also fueling gains

(Updates prices, comment)

By Ellen Freilich

NEW YORK, July 30 (Reuters) - Prospects for slow growth and low inflation led to talk the Federal Reserve could become more accommodative, pushing U.S. government bond prices higher and some short-term yields to record lows on Friday.

A weaker-than-forecast report on U.S. second quarter growth reinforced views economic growth could slow in the second half of the year. The outlook for slow growth and low inflation fed bets the Federal Reserve could further loosen monetary policy.

That helped push the yield on the 2-year Treasury note US2YT=RR to a record low of 0.563 percent. It ended at 0.565 percent on July 21.

Weaker-than-expected final demand last quarter "made the outlook for a sustainable recovery look fragile and that boosted bond prices," said Chris Diaz, co-manager of the ING Global Bond Fund in New York.

Gross domestic product grew at a 2.4 percent annual rate, the government said, after a revised 3.7 percent growth pace in the January-March quarter. Inflation remained low.

"Bonds are doing better because people think the Fed will get more accommodative," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. "It's because of Bullard's paper," he said, referring to a research paper by St. Louis Fed President James Bullard.

The paper addressed a potential scenario of the United States falling into a dynamic of falling prices and investment that would be hard to escape.

The near absence of inflationary pressure has begun to trouble the Federal Reserve, even persuading some heretofore inflation hawks to warn about Japan-style deflation.

Bullard said the Fed's quantitative easing program offered "the best tool to avoid such an outcome."

"Comments from St. Louis Fed President Bullard yesterday that 'the US is closer to a Japanese-style outcome today than at any time in recent history' and that the economy may require 'a permanent, low nominal interest rate outcome' have heightened the markets' sensitivity to the risk of deflation and the potential for further quantitative easing," said Lena Komileva, head of G7 economics at Tullett Prebon in London.

Markets looked past short-term growth figures and anticipated "further quantitative easing from the Fed to shield the economy from the risk of a deflationary debt trap, resulting in lower U.S. Treasury yields," she said.

Benchmark U.S. 10-year Treasury notes US10YT=RR rose 19/32 in price, their yields easing to 2.92 percent from 2.99 percent late on Thursday.

The 30-year Treasury bond US30YT=RR was up 1-11/32, its yield easing to 4 percent from 4.08 percent on Thursday.

"It's the realization that inflation certainly is not going to be an issue," said James Sarni, managing principal and senior portfolio manager at Los Angeles-based Payden & Rygel, with $55 billion assets under management.

John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, said month-end index buying also fueled the bond market's gains.

The July Chicago purchasing management index showed business activity in the U.S. Midwest grew more than expected, news that typically would have caused bonds to cut gains.

But Tom Porcelli, U.S. economist at RBC Capital Markets in New York, expressed some skepticism about the report.

"It's entirely possible that the seasonal factors (in the Chicago PMI) made an over adjustment. The same theory applies to all the indexes--new orders were up, employment was up -- but you've got to take it all with a grain of salt."

Porcelli said the GDP report set the market's tone.

"People are cognizant of the headwinds," he said. (Additional reporting by Emily Flitter; Editing by Andrew Hay)