By Lukanyo Mnyanda Oct. 6 (Bloomberg) -- European bonds rose, sending the yield on the two-year note to the lowest level since March, as regional bailouts of banks including Fortis and sliding stock markets drove investors to the relative safety of government debt. The difference in yield, or spread, between two- and 10-year German notes widened to the most in more than six months as investors favored securities with the shortest maturities on concern the credit crisis will deepen. French bank BNP Paribas SA agreed to take control of Fortis in Belgium and Luxembourg. Stocks slid in Europe and Asia and U.S. index futures dropped. ``The bailout hasn't really helped sentiment and has caused more uncertainty, which is leading to volatility in the market,'' said Wilson Chin, a fixed-income strategist at ING Bank NV in Amsterdam. ``That's promoting more flight-to-safety bids.'' The yield on the two-year note tumbled as much as 16 basis points to 3.12 percent, the lowest level since March 19, and was at 3.15 percent as of 8:30 a.m. in London. The price of the 4 percent note due September 2010 advanced 0.24, or 2.4 euros per 1,000-euro ($1,359) face amount, to 101.55. The yield on the German 10-year bund, Europe's benchmark government security, slipped as much as 12 basis points and was at 3.83 percent. The bund may yield 3.8 percent by year-end, Chin said. Yields move inversely to bond prices. Leaders from the four biggest European economies, meeting in Paris two days ago, stopped short of announcing a coordinated regional rescue package for banks. The U.S. on Oct. 3 signed into law a $700 billion program to remove tainted assets from bank balance sheets. Financial `Storm' BNP Paribas will pay 9 billion euros in stock and 5.5 billion euros in cash for 75 percent of Fortis Bank Belgium, all of the Belgian insurance operations, and 67 percent of Fortis's bank in Luxembourg, the Paris-based bank said today. The German government and the country's banks and insurers agreed on a 50 billion-euro rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered. ``This flurry of events confirms that the financial storm has moved to Europe in full force,'' Marco Annunziata, chief economist at Unicredit MIB in London, wrote in a client note. ``Market volatility is set to remain high this week.'' The Dow Jones Stoxx 600 Index, a European equity benchmark, lost 3.9 percent and the MSCI Asia Pacific Index slid 4.4 percent. Futures on the Standard & Poor's 500 Index fell 1.8 percent. Traders are betting the ECB will lower its main refinancing rate next month. The odds of a 25-basis-point cut are 100 percent, according to a Credit Suisse Group index of derivatives. Bond Returns Government bonds rose last week after European Central Bank President Jean-Claude Trichet said policy makers discussed cutting borrowing costs to buoy the 15-nation economy. HSBC Holdings Plc cut its forecast for euro-area growth next year to 0.4 percent, from 0.9 percent, economists led by Janet Henry in London, wrote in a research note. Two-year notes yielded 69 basis points less than 10-year bunds, the widest spread since March 17. The shorter-dated securities, which are more sensitive to interest-rate expectations, yielded 21 basis points more than bunds as recently as June 6. European bonds outperformed U.S. Treasuries in the past three months, handing investors a 4.7 percent return, compared with 3.4 percent for their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and Treasury Master indexes. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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