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

* Record low yield for 2-yr note; 10-yr nears recent lows

(Recasts lead, updates prices, changes byline, adds quotes)

By Emily Flitter

NEW YORK, July 30 (Reuters) - U.S. Treasury prices rose on Friday as weak U.S. growth data fuelled talk of more accomodative monetary policy and fund managers realigned portfolios to match benchmark indices.

Treasury yields probed recent lows. The benchmark 10-year note yield came within roughly two basis points of a 15-month low and the two-year yield set a new record low.

Price gains were driven in part by news the U.S. economy grew more slowly than expected in the second quarter. The outlook for slow growth and low inflation fed bets the Federal Reserve could further loosen monetary policy.

Month-end buying by fund managers seeking to align the length of maturities with benchmark indices also lifted longer-dated debt.

"I have got to believe that we are going to pause here, because this is a pretty strong move," said David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York.

"We're past (this week's) supply and we had economic data that reinforces the doubts that some of us had about the economic recovery, and those things have helped develop a bid for Treasuries."

Coard said the market would look to the U.S. Department of Labor's monthly report on unemployment and non-farm payrolls for July, due out next Friday.

"If the (payrolls) number shows deterioration, then you could see Treasuries get better from here," Coard said. "But absent that, right now we are probably at resistance levels and I would expect a selloff."

DEFLATION WORRIES

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. The report reinforced views economic growth could slow in the second half of the year.

That helped push the yield on the 2-year Treasury note US2YT=RR to a record low of 0.559 percent during trading. The two year finished the day with 2/32 in price gains for a yield of 0.56 percent. It ended at 0.565 percent on July 21.

"Twos keep attracting a bid. That, to me, says the market senses something bad," said Stewart Taylor, senior trader at Eaton Vance in Boston.

A research paper by St. Louis Federal Reserve President James Bullard fuelled talk of more accomodative Fed policy, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.

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.

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

Benchmark U.S. 10-year Treasury notes US10YT=RR rose 21/32 in price, their yields easing to 2.91 percent from 2.99 percent late on Thursday.

The 30-year Treasury bond US30YT=RR was up 1-15/32, its yield easing to 3.99 percent from 4.08 percent on Thursday.

BUY TODAY, GIVE BACK MONDAY?

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

Expected month-end extension for the Barclays' Treasury index, for example, was 0.06 month for July.

"If it's like most months' end, we'll give some of this back Monday and Tuesday," Eaton Vance's Taylor said, referring to the 10-year Treasury note's price gains.

In another sign that market participants were expecting weak economic conditions to continue, the spread between two-year notes and 10-year notes narrowed to 235 basis points.

"The yield curve was probably too steep given what I think is the weakness in the economy," Coard said. (Additional reporting by Ellen Freilich, Richard Leong and Chris Reese; Editing by Andrew Hay)