NEW YORK - TREASURY yields, some of the most sensitive barometers of investor sentiment, keep dropping to new record lows as a torrent of bad economic news continues.

But as investors send yields down, they're also influencing the economy - driving interest rates so low that savers get punished and borrowers get a break.

On Wednesday, after data showing a contracting service sector and slowing US productivity, Treasury bill yields hovered near zero.

Meanwhile, the yield on the two-year Treasury note fell as low as 0.87 per cent, the 10-year yield sank as low as 2.65 per cent, and the 30-year yield dropped as low as 3.16 per cent.

These were the lowest yields for these Treasurys since the government started issuing them, and the lowest yields for assets equivalent to these Treasurys in more than 50 years, according to Global Financial Data in Los Angeles.

Treasury buying has picked up and sent yields down because the economy is in a recession, one that investors believe will be long and deep.

Yields are also falling because the Federal Reserve has cut its benchmark federal funds rate to 1 per cent.

Investments and lending rates are tied to Treasury yields, so when they fall, people tend to earn less on their savings but pay less on their loans.

According to iMoneyNet Inc.'s Money Fund Report, the average 7-day yield on a money fund fell to 1.04 per cent in the week ended Dec 2, down from 1.12 per cent in the previous week and 1.88 per cent three months ago.

Consumer borrowing rates have started to come down, too, albeit slowly. The average 30-year fixed-rate mortgage is at 5.92 per cent, according to Bankrate.com, down from 5.97 per cent the previous week and 6.55 per cent three months ago.

'When the Fed adopts an easy money policy, it does favour borrowers over savers,' said Mr Gary Thayer, chief economist at Wachovia Securities.

'Obviously, savers aren't getting very good return on their money. But compared to other assets, it's better than the losses that are being suffered elsewhere.'

Although money market and day-to-day accounts are offering savers less, there are some incentives for individuals to put their money into certain interest-bearing accounts.

Banks are offering decent rates on certificates of deposit when compared with Treasurys and inflation, pointed out Greg McBride, senior financial analyst at Bankrate.com.

This is because, as demand has drained from the credit markets, deposits have become the surest and cheapest way for banks to get funding.

But in general, the US government's decision to slash rates and committing hundreds of billions of dollars to saving mortgages and rescuing banks is aimed at spurring borrowing and lending again to boost the economy.

The worry, though, is that when the market's fears eventually abate, the government will be in a bind: Stimulating the economy by slashing rates and other actions for too long could risk another bubble of debt, but withdrawing the stimulus too quickly could hurl the economy back into recession.

The main reason behind the recent economic downturn is that people increasingly relied on credit over the past couple decades, using their rising home values as piggy banks and credit card lines like bank accounts.

Total consumer credit, which doesn't even include mortgages, jumped from about US$700 million (S$1.065 billion) in 1988 to US$1.4 trillion in 1998 to $2.6 trillion this year, according to Federal Reserve data.

And over that period of time, the average personal savings rate fell from about 8 per cent in the late 1980s to 4 per cent in the late 1990s to negative territory by 2005, according to the Bureau of Economic Analysis.

When the housing market started plunging, mortgage defaults spiked since people had no cushions to fall back on. Now, nearly all types of loans are seeing default rates rise.

'Consumers have borrowed and borrowed and borrowed,' said Mr Jay Mueller, portfolio manager at Wells Fargo Advantage Funds.

'If the problem has been too much borrowing by too many people who can't pay it back, I'm not sure if more lending is going to solve things.'

In the meantime, though, economists say that as the credit crunch continues and the consumer-driven recession worsens, it is not the time for the government to discourage borrowing - and current trends in Treasury yields and other rates are beneficial in the short-term for the economy.

'At this point in the cycle, the bigger issue is getting the economy back on its feet,' said Mr Thayer.

'The longer term issue is something we can address later when the economy is healthy.'

In late trading, demand for Treasurys picked up on Wednesday even as the Dow Jones industrial average rose 172 points and bank-to-bank lending rates dipped.

The 2-year Treasury note was flat at 100 22/32 and yielded 0.89 per cent, unchanged from late Tuesday. The 10-year Treasury note rose 9/32 to 109 12/32 and yielded 2.67 per cent, down from 2.70 per cent.

The 30-year Treasury bond rose 12/32 to 125 10/32 and yielded 3.17 per cent, down from 3.19 per cent.

The three-month Treasury bill's yield was at 0.02 per cent, down from 0.05 per cent late on Tuesday. The discount rate was 0.02 per cent. -- AP