WASHINGTON — Treasuries posted their biggest gains in three years yesterday on concern that the Federal Reserve's quarter-point reductions in borrowing costs won't be enough to avoid the risk of recession.

Yields on two-year notes, more sensitive to expectations of further rate cuts than longer-maturity debt, dropped below 3 percent after the central bank lowered its target for overnight loans to 4.25 percent and the rate it charges banks to borrow directly to 4.75 percent.

"It's clear to us the trend is still toward lowering rates to cope with both an extremely sluggish economy and a continuation of distress in financial markets," said Chris Molumphy, who oversees $150 billion as chief investment officer for fixed income at San Mateo, Calif.-based Franklin Templeton.

Two-year note yields fell 22 basis points, or 0.22 percentage points, to 2.96 percent yesterday afternoon in New York, according to bond broker Cantor Fitzgerald LP.

The price of the 3 1/8 percent note due in November 2009 rose 13/32, or $4.06 per $1,000 face amount, to 100 11/32.

The yield on the benchmark 10-year note decreased 18 basis points to 3.98 percent, the biggest drop since August 2004.

The change in rates "should help promote moderate growth over time," the Federal Open Market Committee said in a statement after meeting today in Washington.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation."

The Federal Reserve's Board of Governors left the gap between the discount rate, the cost of direct loans from the central bank, and the federal funds rate at half a point.

Some economists had predicted the Fed would reduce the spread to jump-start lending and remove the stigma of borrowing directly from the Fed.

"The assumption of the Treasury market is that the discount-rate cut won't free up liquidity," said Sean Simko, who oversees $8 billion at SEI Investments Co. "The flight-to-quality, flight-to-liquidity trade is going to continue."

In a sign traders expect banks to remain reluctant to lend to each other, the three-month dollar London Interbank Offered Rate rose to 4.85 percent from about 4.64 percent before the Fed's announcement. The rate was 4.73 percent late yesterday.

The rate is now at the highest since Nov. 19.

Yields on three-month Treasury bills, regarded as a haven for investors in times of turmoil, fell 12 basis points to 2.91 percent, near their 3 1/2-month low of 2.89 percent.