By Anchalee Worrachate Dec. 18 (Bloomberg) -- European two-year government note yields were near the lowest level in at least 18 years before a report that will probably show business confidence slid in Germany, the region’s largest economy, fueling speculation policy makers will cut interest rates next month. Gains yesterday sent the yield on the 10-year German bund to less than 3 percent at the close for the first time since at least 1989. The Munich-based Ifo institute will say today that its business climate index, based on a survey of around 7,000 executives, fell to 84, from 85.8 in November, according to economists. Last month’s reading was the lowest in 16 years. “It’s going to get worse,” said Wilson Chin, a fixed-income strategist at ING Groep NV in Amsterdam. “The economy has yet to reach the bottom. There’s a scope for the ECB to cut interest rates further and bond yields to fall.” The two-year yield was at 1.88 percent as of 7:05 a.m. in London. It fell yesterday to the lowest level since at least 1990, when Bloomberg records began. The 2.25 percent security due December 2010 slipped 0.02, or 20 euro cents per 1,000-euro ($1,441) face amount, to 100.71. The yield on the 10-year bund, Europe’s benchmark government security, was at 2.99 percent. Yields move inversely to bond prices. The world’s biggest central banks are lowering borrowing costs to combat the worst economic decline since the Great Depression. The Federal Reserve cut its target rate for overnight loans to a range of zero to 0.25 percent on Dec. 16 and pledged to buy unlimited quantities of securities. Possible steps in coming months include financing for a new package to shore up the housing industry and expanding a $200 billion program to underpin credit card and student loans. German bonds returned almost 12 percent this year, compared with more than 11 percent for gilts and more than 14 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Government, U.K. Gilts and U.S. Treasury Master indexes. By comparison, the Stoxx 600 slid 46 percent. Oil fell 58 percent. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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