By Kim-Mai Cutler Oct. 27 (Bloomberg) -- European two-year government notes extended a five-week advance as stocks fell amid evidence the global financial crisis is driving the 15-nation economy into a recession. The gains sent the yield on the two-year note below 2.6 percent for the first time in three years as an industry survey showed business confidence in Germany, Europe's largest economy, fell more than economists forecast this month. Investors sought the safest of assets as the euro slipped to the weakest since April 2006 against the dollar and the cost of protecting European corporate bonds from default climbed to a record. ``There are concerns about all of it -- the banks' balance sheets, hedge-fund withdrawals, emerging markets and the commercial paper market,'' said Kornelius Purps, a fixed-income strategist in Munich at Unicredit Markets and Investment Banking. ``All of these concerns are leading to safe-haven flows into the government bond markets.'' The yield on the two-year note slipped 5 basis points, or 0.05 percentage point, to 2.61 percent by 10:12 a.m. in London, near the lowest level since October 2005. The 4 percent note due September 2010 rose 0.08, or 80 euro cents per 1,000-euro ($1,237) face amount, to 102.46. The yield on the German 10-year bund, Europe's benchmark government-debt security, fell 1 basis point to 3.74 percent. Yields move inversely to bond prices. Two-year yields, which are most sensitive to the outlook for interest rates, fell 1.1 percentage point in the past month as the deepening credit crisis erased more than $10 trillion of equity-market value around the world, encouraging investors to buy shorter-dated debt, seen as the safest asset. Yield to Drop The yield on two-year notes may slip to 2 percent as the European Central Bank cuts interest rates by a full percentage point to prevent a credit market seizure from driving the economy into a prolonged recession, Purps predicted. The Ifo institute's business climate index, which surveyed 7,000 business executives in Germany, fell for a fifth month, to 90.2, from 92.9 in September. Economists had forecast a drop to 91.0, according to the median of 23 forecasts in a survey by Bloomberg News. Stocks tumbled around the world and U.S. stock-futures declined on concern government efforts to stabilize financial markets won't avert a recession. Hong Kong's Hang Seng Index sank 13 percent after money-market rates rose, and the Philippines' benchmark gauge plunged 12 percent, triggering a temporary trading halt. Dollar as Refuge Europe's benchmark Dow Jones Stoxx 600 Index fell 5 percent and the euro slipped to its weakest in 2 1/2 years 2006 against the dollar. Investors sought a refuge in the U.S. currency against losses in emerging-market assets. The euro slid 12 percent against the dollar and 23 percent versus the yen this month. European bonds were also buoyed as the cost of protecting corporate debt from default rose to a record, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings gained 50 basis points. The index is a benchmark for the cost of protecting bonds against default and an increase indicates a deterioration in the perception of credit quality. Interest-rate futures show traders are increasing bets the ECB will lower its main refinancing rate by at least a half-point at it meeting on Nov. 6. The implied yield on the December Euribor futures contract dropped 8 basis points to 3.83 percent today, the lowest level since March. European bonds outperformed U.S. Treasuries this month, handing investors a 2.3 percent return, compared with 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: Kim-Mai Cutler in London at kcutler@bloomberg.net

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