TREASURIES-Bonds gain as GDP data points to recession risk

* Data shows economy expanded by 1.3 pct in second quarter

* Growth of mere 0.4 pct in Q1 reinforces weak picture

* Prospects for Fed accommodation constructive for bonds
(Updates prices)

By Ellen Freilich

NEW YORK, July 29 (Reuters) - U.S. Treasuries prices rose
on Friday as news the U.S. economy grew at an even slower pace
in the first half of the year than economists had estimated
raised fears the economy was headed for another recession.

Gross domestic product -- a measure of all goods and
services produced within U.S. borders -- grew at a 1.3 percent
annual rate in the second quarter, the Commerce Department
said.

In addition, output in the first quarter was sharply
revised down to a 0.4 percent pace from 1.9 percent.

Economists had expected the economy to expand at a 1.8
percent rate in the second quarter.

A report on Chicago-area manufacturing also was weaker than
economists had forecast in July, though it showed growth.

Benchmark 10-year notes US10YT=RR climbed a point in
price, their yield easing to 2.83 percent from 2.95 percent
late on Thursday, while 30-year bonds rose 1-22/32 their yields
easing to 4.16 percent from 4.26 percent.

The slow-growth scenario favored safe-haven U.S. debt and
raised the prospect of further monetary accommodation.

"Economic growth ... was much weaker than the government
had previously estimated and this opens the door for
potentially another round of quantitative easing from the
Federal Reserve," said Gary Thayer, chief macro strategist at
Wells Fargo Advisors in St. Louis. "Therefore, the bond market
responded positively to the weak GDP number while the dollar
weakened."

The data showed the U.S. economy in greater danger of
dipping into another recession than many had thought.

"The problem in the second quarter was very, very
restrained consumer spending," said Pierre Ellis, senior
economist at Decision Economics in New York. "A revival in
consumer spending is critical to keeping us out of recession.

"We're in a situation where employment must grow and
generate GDP growth and whether that will happen has become the
issue of the day," he said.

Month-end buying and nervousness before a weekend of debt
ceiling talks and potential votes reinforced investors'
inclination to buy U.S. Treasuries, Ader said.

Efforts to raise the U.S. debt ceiling and avert a
government default, so far unsuccessful, dragged on.

Weak U.S. growth in the first half of the year underscored
the reality that spending cuts tied to a debt ceiling increase
could topple the economy into recession.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Full coverage of U.S. budget and debt [nUSBUDGET]

SCENARIOS-Obama options if no debt deal [nN1E76O0QG]

Graphics package r.reuters.com/nud82s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Rates on Treasury debt maturing in August jumped to
six-month highs as investors dumped it on fear the government
might postpone repayment.

Rates on the $91 billion in Treasury bills that mature on
Aug. 4 9127953B5=TWEB, the first debt to mature after the
government's Aug. 2 deadline for possibly running out of cash,
rose to 28 basis points, the highest rate the bills have paid
since they were issued on Feb. 3.

The bills had traded at near zero percent until the past
two weeks, when investors reacted to the debt ceiling impasse.

"There's an ongoing theme of exiting from these bills that
mature after Aug. 2," said Carl Lantz, interest rate strategist
at Credit Suisse in New York.

Most analysts expect the government will be able to roll
over debt maturing on Aug. 4, as well as an additional $93
billion maturing on Aug. 11.

The cost of borrowing funds overnight in the repo market
also jumped in volatile trading on Friday, to 25 basis points,
up from 14 basis points on Thursday.
(Additional reporting by Karen Brettell and Chris Reese;
Editing by Kenneth Barry)