By Andrew MacAskill Oct. 23 (Bloomberg) -- European government bonds rose as regional stocks dropped, French business confidence slumped and Finland's Finance Minister Jyrki Katainen said a recession may last several years, driving investors to the safest assets. The 10-year German bund climbed for a sixth day, the longest run of gains since August, and two-year note yields fell to the lowest level in almost three years. Europe's Dow Jones Stoxx 600 Index lost 0.4 percent and Credit Suisse Group AG reported its second quarterly loss this year. Recession may be ``very close'' for all European countries, Katainen said yesterday. ``Risk aversion and fears of an ongoing recession are still the theme keeping the floor under bonds,'' said Orlando Green, a fixed-income strategist in London at Calyon, the investment- banking unit of France's Credit Agricole SA. ``The market is going to remain focused on the doom and gloom.'' The yield on the two-year note fell 2 basis points to 2.79 percent, the lowest since January 2006, by 5:04 p.m. in London. The price of the 4 percent note due September 2010 climbed 0.03, or 30 euro cents per 1,000-euro ($1,285) face amount, to 102.17. The yield on the bund, Europe's benchmark government security, declined 2 basis points to 3.79 percent. Yields move inversely to bond prices. Two-year note yields dropped 16 basis points this week as concern the credit-market meltdown is tipping the global economy into a recession encouraged investors to buy shorter-dated debt. French Sentiment Business sentiment in France, the euro region's second- largest economy, slid in October to the lowest level in almost 15 years, Insee, the Paris-based national statistics office said today. An index of confidence among 4,000 manufacturers fell to 88, from 91 in September. ``Recession is very close in some particular countries, maybe in all the European countries,'' Katainen said in a Bloomberg Television interview in Helsinki. ``I don't know how long a recession or down-cycle we will face, but maybe it will take some two or three years. Even if we can calm the international turmoil, slower economic development will follow.'' The difference in yield, or spread, between two- and 10-year German notes was at 100 basis points today, down from 117 basis points on Oct. 16, which was the most since June 2005. That narrowing equates to a so-called flattening of the yield curve, a chart of yields on securities of varying maturities. A flattening curve suggests investors are reducing bets for further interest rate cuts. Rate-Cut Odds ``If you want to be a bit more proactive then you want to be looking for a flattening of the curve,'' Green said. ``The curve has pretty much exhausted its steepening move.'' Gains that yesterday pushed two-year yields to the lowest level since December 2005 may be exaggerated, according to Peter Mueller, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``We saw a significant jump yesterday and maybe it was too strong a move,'' Mueller said. ``There was no new information and maybe it was overdone. Today's moves will be more limited.'' ``We are in a position to diminish rates without adding to inflationary risks,'' the Irish Independent newspaper quoted Jose Manuel Gonzalez-Paramo, a member of the ECB's executive board, as saying in an interview published today. European bonds outperformed U.S. Treasuries this month, handing investors a 2.1 percent return, compared with 1.1 percent for their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes. To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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