By Andrew MacAskill Oct. 20 (Bloomberg) -- European government bonds dropped as stocks gained after South Korea and the Netherlands joined a global effort to shore up financial institutions, weakening demand for the safest assets. The declines pushed yields on 10-year German bunds up from the lowest level in more than a week as the MSCI World Index of stocks extended its biggest weekly gain since 2003. South Korea's government guaranteed $100 billion of lenders' foreign- currency debt and provided $30 billion in U.S. dollars to banks, while ING Groep NV, the biggest Dutch financial-services firm, got a 10 billion-euro lifeline from the Netherlands. ``Equities have bounced back and that is weighing on bonds,'' said Charles Diebel, head of European interest-rate strategy in London at Nomura International Plc. ``There is a feeling more and more that governments have done enough'' to stabilize the banking system. The yield on the 10-year German bund, Europe's benchmark government security, rose 3 basis points to 4.05 percent as of 9:37 a.m. in London. The price of the 4.25 percent security maturing in July 2018 dropped 0.27, or 2.7 euros per 1,000-euro ($1,352) face amount, to 101.58. The yield on the two-year German note rose 1 basis point to 3.02 percent. Yields move inversely to bond prices. The difference in yield between two- and 10-year German notes narrowed, after widening to the most in more than three years last week as investors added to bets slowing growth will persuade the European Central Bank to cut interest rates. The gap was 102 basis points, from 117 basis points on Oct. 16, the most since June 2005. German Inflation European bonds stayed lower as inflation in Germany, Europe's biggest economy, unexpectedly accelerated in September. Producer prices rose 8.3 percent from a year earlier, after increasing 8.1 percent in August, the Federal Statistics Office in Wiesbaden said today. The median of 28 estimates in a Bloomberg News survey was for a reading of 7.5 percent. Europe's benchmark Dow Jones 600 Index rose 3.8 percent today and the MSCI World Index climbed 1.4 percent as the cost of borrowing between banks fell. Hong Kong's three-month interbank rate dropped the most in 10 years today. The comparable London interbank offered rate, or Libor, for U.S. dollar loans will decline to 4.15 percent, according to David Buik, a market analyst in London at interdealer broker BGC Partners Inc. ``The easing of money markets will continue,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``In the near-term, we can expect this to help risk appetite,'' hurting bonds, he said. There is scope for bonds to rebound as Europe enters a recession, according to Diebel, who predicts two-year yields will slip to 2.8 percent by year-end. That compares with median forecasts of 3.52 percent in a Bloomberg survey. Economic growth in the 15 euro-zone nations may miss the ECB's 1.2 percent forecast for 2009 as financial-market turmoil affects the rest of the economy, central bank policy maker Ewald Nowotny said yesterday in an interview with Austrian broadcaster ORF-TV. To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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