Despite default risks, Treasury bond yields plunge as buyers rush in

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Whatever fear global investors may have about a potential U.S. debt default, it’s being trumped for the moment by another fear: that the economy could be headed back into recession.

Money is pouring into Treasury notes and bonds Friday, driving yields down sharply, after the government said the economy grew at a dismally weak annualized rate of 1.3% last quarter -- below even the lousy 1.8% consensus estimate of economists.

The benchmark 10-year Treasury note yield (charted below) has tumbled to a new 2011 low of 2.83% from 2.95% on Thursday.

The two-year T-note has slumped to 0.37% from 0.42%.

Many analysts had been warning that government bond yields could soar if the debt drama in Washington continued, with Congress unable to agree on extending the federal debt ceiling that the Treasury says will be reached on Tuesday.

Without an increase in the ceiling the Treasury won’t have enough money to pay all of its bills, which could lead to a debt default -- although there’s debate about when the Treasury actually would run dry of cash, and whether bondholders (as opposed to other government creditors) actually would get stiffed.

The debt-ceiling drama is giving investors pause in one part of the Treasury market: the shortest-term securities. Those yields have been rising in recent days because of concerns that a default would hit them first. The six-month T-bill yield rose to 0.16% Friday from 0.12% on Thursday and 0.08% a week ago.

But investors are showing no fear of owning longer-term Treasuries, even with the major credit-rating firms threatening to downgrade the U.S. from AAA to AA.

Some bond traders said Friday’s rally reflected renewed hopes that Congress will strike a deal on the debt ceiling this weekend. In any case, the GDP report just further stoked demand.

With the economy faltering and Washington politics at their worst, many investors again are looking for a haven. Treasuries still are filling that bill, whether counterintuitive or not.

So is gold: The metal closed at a record high Friday, gaining $14.90 to $1,628.30 an ounce.

-- Tom Petruno

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