By Ambrose Evans-Pritchard

LONDON, England - August 18, 2011 - The global credit markets are braced for deflation and perhaps depression.

Panic flight to safety has pushed the yield on 10-year U.S. Treasuries below 2% for the first time in modern Amerikan history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.

Investors scrambled to buy the bonds of strongest industrial states on Thursday on fears of a double-dip recession on both sides of the Atlantic and a European banking crash, driving down their returns to investors. German yields fell to 2.08% and Switzerland's 3-month rates have turned deeply negative.

Markets were stunned by a plunge in the manufacturing index of the Philadelphia Federal Reserve to minus 30.7 in August from plus 3.2 in July, one of the most violent falls ever recorded.

"It is a catastrophic collapse," said Rob Carnell from ING. "Markets are in a fearful state right now, and data like this gives them plenty of excuses to panic."

Andrew Roberts, credit strategist at RBS, said investors are haunted by fears that European banks may have lost full access to America's $7 trillion markets, leaving them at imminent risk of a dollar squeeze.