TREASURIES-U.S. debt rallies as stock plunge spurs safety bid

* Long-dated Treasuries outperform on Fed purchase plan

* Fed plans to invest $400 billion in long-term U.S. debt

* Bonds set for best 2-day performance since at least 1987
(Adds trader's quote, updates prices)

By Chris Reese

NEW YORK, Sept 22 (Reuters) - Long-dated U.S. government
debt soared on Thursday as investors fled riskier assets,
extending the previous day's advance on the Federal Reserve's
plan to invest $400 billion in long-term Treasuries.

As investors turned their back on risk, major U.S stock
indexes .SPX .IXIC .DJI tumbled over 3.5 percent as the
Fed's sober outlook on the economy and downbeat data out of
Europe and China heightened fears of another global recession.

"The Treasuries market is getting a flight-to-quality bid,"
said Mary Ann Hurley, vice president of fixed income trading at
D.A. Davidson & Co in Seattle. "Not only do we have Operation
Twist coming, but you have a Fed that ramped down its
expectations for economic growth, which is what the stock
market is trading off of, and you have Europe as a major
problem,"

Benchmark U.S. 10-year notes US10YT=RR traded 1-9/32
higher in price with their yields falling to 1.73 percent,
marking the lowest level in at least 60 years and down from
1.87 percent late Wednesday.

"Investors know the Fed will be buying bonds so they think
Treasuries are a safe haven," said Gary Thayer, chief macro
strategist at Wells Fargo Advisors in St. Louis, Missouri.

On Wednesday, the Fed announced a plan aimed at cutting the
cost of mortgages, corporate bonds and other kinds of credit by
buying long-term federal debt over the next nine months,
raising money for the purchases by selling holdings of
short-term debt. The plan is known in the financial markets as
Operation Twist.

The Fed also noted "significant" risks to the economy.

"That made investors nervous," Thayer said. "They've been
worried about downside risks for months now and we're not
seeing a lot of action by policymakers to reduce those risks."

While the Fed will buy longer-dated Treasuries and major
central banks worldwide agreed last week to provide dollar
loans to banks to avoid a potential cash crunch at year-end,
investors want more concrete action, Thayer said, as he
highlighted the European debt crisis.

"Support for the European economy is needed, either with a
commitment for continued funding or some sign of agreement that
the stabilization fund will be expanded," he said.

The European Union's new watchdog, the European Systemic
Risk Board, warned that the debt crisis that began in Greece in
2009 threatened financial stability of the EU as a whole and
hurt the real economy in Europe and beyond. For more see
[ID:nL5E7KL6ST].

Meetings of the International Monetary Fund and Group of 20
major economies began on Thursday in Washington.

The strategy of buying longer-dated Treasuries at the
expense of shorter ones pushed the price of 10- and 30-year
Treasuries sharply higher, shrinking the difference between
short- and long-term yields.

The 30-year bond US30YT=RR climbed 4-21/32 in price, with
its yield falling to 2.79 percent from 2.99 percent late on
Wednesday. Bonds were on track for the best two-day performance
since at least October 1987 during the Black Monday stock
market, according to Reuters data.

The difference between 2- and 10-year yields stood at 152
basis points on Thursday, down sharply from 204 a month ago
when markets began to anticipate more monetary easing.

The Fed's decision to focus a significant chunk -- 29
percent -- of its purchases in the 20- to 30-year area boosted
that part of the maturity curve.

"The Fed is buying a lot more long bonds than we thought,"
said Steve Van Order, fixed income strategist with Calvert
Investment Management Inc, based in Bethesda, Maryland and
which has more than $14.5 billion in assets under management.
(Additional reporting by Ellen Freilich; Editing by Chizu
Nomiyama)