By Andrew MacAskill Oct. 21 (Bloomberg) -- European government bonds advanced for a fourth day as U.S. stock-index futures declined and traders increased bets policy makers will cut interest rates by year-end to revive the faltering economy. The gains pushed yields on 10-year German bunds to the lowest level in more than a week as the odds on the ECB cutting rates by more than a quarter of a point rose to 50 percent. Inflationary pressures in the euro region will ease quicker than forecast, European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said in an interview with Spain's La Voz de Galicia newspaper today. ``ECB policy makers show there has been an abrupt shift away from inflation to growth concerns, meaning further rate cuts are inevitable,'' said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. ``The performance of the bund market today is quite impressive.'' The yield on the 10-year bund, Europe's benchmark government security, dropped 5 basis points to 3.96 percent by 1:08 p.m. in London. The 4.25 percent security due July 2018 climbed 0.38, or 3.8 euros per 1,000-euro ($1,323) face amount, to 102.25. The yield on the two-year note fell 5 basis points to 2.89 percent. Yields move inversely to bond prices. U.S. stock-index futures slid after Texas Instruments Inc., the second-largest U.S. semiconductor maker, predicted earnings that trailed analysts' estimates and Sun Microsystems Inc. said sales fell short of estimates. Stamenkovic favors shorter-dated German notes over 10-year bunds as the ECB lowers interest rates and inflation quickens, he said. Bunds are most sensitive to the outlook for consumer-price growth. `Five-Year Cheap' ``The five-year looks cheap,'' Stamenkovic said. ``The market is only factoring in rates going up next year and I think they are going to keep falling into at least the first half of 2009. Consequently, the five-year should outperform, while the 10-year is likely to lag behind.'' The yield on the 4 percent German security due October 2013 was 3.51 percent today, and may drop to 3.1 percent by year-end, Stamenkovic said. European bonds have outperformed Treasuries this month, returning investors 0.9 percent, compared with a loss of 1.2 percent on U.S. debt, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master Indexes. The difference in yield, or spread, between two- and 10-year German notes widened to 108 basis points today from 92 basis points a week ago, a steepening of the so-called yield curve that indicates investors are increasing bets on further interest-rate reductions. Bonds also gained as the International Monetary Fund said more European banks may fail as they struggle to raise fresh capital from investors. France said yesterday it will invest $14 billion in banks and the U.S. moved toward a second stimulus package to limit the severity of the economic slowdown. Greece sold 1.5 billion euros of 4.6 percent notes maturing in 2018 today, with demand for the securities exceeding the amount on offer 2.95 times. Bids on the securities exceeded the amount offered by 2.52 times at a previous auction of the notes in August. To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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