By Agnes Lovasz Oct. 17 (Bloomberg) -- European two-year notes rose for a fourth week on concern the region is on the brink of a recession, raising the likelihood policy makers will reduce interest rates. Gains this week pushed the yield on the two-year note to the lowest level since Oct. 10, and left it 110 basis points lower than a month ago. Confidence in the world economy tumbled in October after a deepening freeze in bank lending weighed on corporate investment and consumer spending, a Bloomberg News survey showed this week. Interest-rate futures show traders have raised bets the European Central Bank will cut borrowing costs this year. ``Flows continue to fly into the front end,'' Padhraic Garvey, a fixed-income strategist at ING Bank NV in Amsterdam, wrote in a research note today. ``Conditions in the money markets have improved, but only marginally. At best, expect a slow grind resolution of this problem, and certainly no dramatic turnaround in the coming six months.'' The yield on the two-year note fell 7 basis points this week to 2.97 percent by 5:40 p.m. in London. The price of the 4 percent security maturing in September 2010 climbed 0.14, or 1.4 euros per 1,000-euro face amount, to 101.89. The yield rose 7 basis points today. The yield on the German bund, Europe's benchmark government security, rose 2 basis points in the week to 4.01 percent in London. It fell 6 basis points today. Two-year yields may drop to 2 percent by year-end, Garvey predicted. Yields move inversely to bond prices. The difference in yield between two- and 10-year German notes narrowed to 104 basis points, from 117 basis points yesterday, the most since June 2005. The spread widened from 96 basis points a week ago on speculation faltering growth will persuade the ECB to cut interest rates. Futures Trend Traders raised bets the ECB will cut borrowing costs this year from 3.75 percent, after lowering them a half-percentage point last week in concert with other central banks around the world. The implied yield on the December three-month Euribor futures contract fell 11 basis points today, to 3.89 percent, leaving it 26 basis points lower since Oct. 10. The International Monetary Fund last week forecast global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's informal definition. Any increases for bonds may be limited as stocks in Europe rose and money-market rates eased. The Dow Jones Stoxx 600 increased 3.8 percent. The cost of borrowing dollars in London for three months fell, capping the first weekly drop since July. The dollar rate slipped 8 basis points to 4.42 percent, the British Bankers' Association said. ``Risk aversion is decelerating and that is the most negative thing for the bond market,'' said Michael Markovic, a senior fixed-income strategist in Zurich at Credit Suisse Group, Switzerland's second-biggest bank. ``This will limit the rally potential for bonds.'' To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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