* Govt may postpone debt sales if ceiling not extended
* Lower-than-expected Q2 GDP growth raises recession fear
* Ten-year note set for best performance since March, 2009 (Adds analysts' quotes, updates prices)
By Chris Reese
NEW YORK, July 29 (Reuters) - U.S. Treasury debt prices soared on Friday on fears a U.S. default could trigger a shortage of Treasuries and even push the world's largest economy back into recession.
The buying started with data showing the economy grew at an even slower pace in the first half of the year than economists had estimated.
Bidding surged and 30-year bonds jumped more than 2 points after Reuters reported that Treasury officials told Wall Street banks the Treasury may have to delay or cancel a major round of bond sales if Congress does not raise the nation's debt ceiling by Aug. 2. For details see [ID:nN1E76S0C9].
"A lot of factors converged to lead us higher today. You got a gross domestic product number that was horrible, and that spooked a lot of people -- once we get beyond this debt ceiling issue we have got an economy that is really struggling," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
The potential that the Treasury might postpone debt sales in the event the debt ceiling is not extended by next Tuesday bolstered Treasuries on concerns fund managers and short-term traders might have to compete for tight supply for their everyday operations.
"There's a lot of demand for these issues, just kind of a natural demand that always comes up," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco. "So with less or truncated supply you have a lot more demand chasing less supply."
Benchmark 10-year notes US10YT=RR traded 1-9/32 higher in price, their yields dipping to 2.79 percent, marking the lowest in eight months and down from 2.95 percent late on Thursday. Benchmark yields were set for the biggest single-day drop in yield since March 18, 2009, when the Federal Reserve announced a round of $300 billion in Treasuries purchases, known as QE1.
"With the whole situation around the debt ceiling you've got a lot of nervousness going into the weekend and any shorts that have been in the market have covered up," Mitchell said.
Efforts to raise the U.S. debt ceiling and avert a government default, so far unsuccessful, dragged on heading into the weekend. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Full coverage of U.S. budget and debt [nUSBUDGET] SCENARIOS-Obama options if no debt deal [nN1E76O0QG] Graphics package r.reuters.com/nud82s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Growth in gross domestic product -- a measure of all goods and services produced within U.S. borders -- rose 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. For details see [ID:nCAT005481].
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.
"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.
Thirty-year Treasury bonds US30YT=RR traded 2-11/32 higher in price to yield 4.12 percent, down from 4.26 percent late on Thursday.
Worries over the eventual outcome of a debt crisis in Europe have also recently supported longer-dated U.S. government debt prices, and the 30-year bond was on track for its biggest monthly drop in yield since August 2010. (Editing by Dan Grebler)