By Andrew MacAskill Oct. 20 (Bloomberg) -- European government bonds were little changed, with the two-year note yield near the lowest level in more than 2 1/2 years, as traders increased bets the European Central Bank will cut interest rates by more than a quarter point to revive the slowing economy. The yield on the two-year note was close to the lowest since February 2006. The chances that the ECB will cut its main refinancing rate by half a point increased to 50 percent, a Credit Suisse Group index of derivatives showed today. The ECB's economic forecasts are to be revised lower when new projections are issued in December, policy maker Gertrude Tumpel-Gugerell said at a conference in Prague. ``We are going through a fairly recessionary phase and you are going to see a wave of buying this week,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``This is keeping bonds supported.'' The yield on the two-year note was little changed at 2.95 percent by 3:10 p.m. in London, after rising as high as 3.08 percent earlier. The 4 percent security due September 2010 traded at 101.90. The yield on the 10-year German bund, Europe's benchmark government security, was 4.01 percent. Yields move inversely to bond prices. There is scope for bond yields to fall as the European economy enters a recession, according to Charles Diebel, head of European interest-rate strategy in London at Nomura International Plc, who predicts the two-year yield will slip to 2.8 percent by year-end. That compares with a median forecast of 3.52 percent in a Bloomberg survey. Safe-Haven Support ``Longer term we are going to see the safe-haven support for bonds return,'' Diebel said. ``Weakness in the economy is going to drive the market.'' The yield on the 10-year bund may fall to 4.05 percent by year-end, he predicted. Economic growth in the 15 nation euro region may miss the ECB's 1.2 percent forecast for 2009 because of the financial- market turmoil, Ewald Nowotny, an ECB council member, said yesterday in an interview with Austrian broadcaster ORF-TV. In September, the Frankfurt-based ECB forecast the region's economy would expand about 1.4 percent this year and 1.2 percent in 2009. The ECB's next policy decision is scheduled for Nov. 6. Money-market rates fell today, extending last week's declines, as the Netherlands and South Korea joined efforts by governments to bail out troubled banks. The London interbank offered rate, or Libor, that banks charge each other for three- month loans in dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months. The overnight-dollar rate declined 16 basis points to 1.51 percent, the lowest level in more than four years. ING Groep NV, the biggest Dutch financial-services firm, will get a 10 billion-euro ($13.4 billion) lifeline from the Dutch government after mounting credit-market losses drove the stock to a 13-year low. ECB Jean-Claude Trichet said in a French radio interview yesterday policy makers have put banks ``on the path'' to recovery by pumping unprecedented amounts of cash into money markets. To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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