By Anchalee Worrachate Dec. 18 (Bloomberg) -- European government bonds dropped, snapping a three-day advance that sent yields to all-time lows, after a rebound in stock markets sapped demand for the relative safety of fixed-income securities. Equities recovered on speculation U.S. President-elect Barack Obama will seek approval for an $850 billion stimulus plan. Germany said it will sell the most debt since World War II next year. Bond gains earlier pushed the two-year yield to a record low of 1.84 percent as a survey showed German business confidence dropped this month to the weakest in more than a quarter century. “A pullback is to be expected given a sharp rally in bonds that we’ve seen this week and a rebound in stocks,” said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. “It’s perhaps also a realization that we are going to have a lot of bond supply to digest in coming months.” The yield on the two-year note fell two basis points to 1.89 percent as of 11:30 a.m. in London, after earlier slipping to the lowest level since at least 1990, when Bloomberg records began. The 2.25 percent security due December 2010 dropped 0.04, or 40 euro cents per 1,000-euro ($1,457) face amount, to 100.69. The yield on the 10-year bund, Europe’s benchmark government security, climbed three basis points to 3.01 percent. It fell to 2.95 percent earlier, one basis point from the lowest level since Bloomberg started compiling the data in 1989. Yields move inversely to bond prices. Ifo Reading The Munich-based Ifo institute said its climate index, based on a survey of 7,000 executives, fell to 82.6 this month, from 85.8 in November. That’s the lowest since data for a reunified Germany was first compiled in 1991. The yield gap between the two- and 10-year notes widened to 113 basis points from 112 basis points yesterday and 108 basis points at the start of the week. The steepening yield curve suggested investors raised bets the economic slumped will deteriorate and borrowing costs will fall. Equity markets in Europe and Asia rebounded, with the Dow Jones Stoxx 600 Index rising as much as 0.6 percent before retreating and the MSCI Asia Pacific Index adding 0.6 percent. U.S. stock-index futures were higher. A technical indicator which some traders watch for price movements signaled the 28 basis-point decline in 10-year yields this week may be excessive. The German bund’s 14-day relative strength index, a comparison of the magnitude of gains and losses, was at about 73 yesterday, above the 70 level that signals a change in direction is imminent. Debt Sales Spain sold 2.5 billion euros of 24-year and 30-year bonds today. The 5.75 percent debt due July 2032 was sold at an average yield of 4.297 percent, and the 4.9 percent security due July 2040 cleared at an average yield of 4.194 percent. Germany will issue 323 billion euros of debt next year, the highest since the second world war, to finance its budget deficit, the Federal Finance Agency said today. The sales will comprise 149 billion euros in securities with maturities of more than one year and 174 billion euros of shorter-dated money-market securities. Further declines may be limited after ECB Governing Council member Axel Weber said yesterday the benchmark rate could “briefly” fall below 2 percent, according to Dow Jones. “Given our lack of experience with sub-2 percent nominal rates, we’ve got to be very careful in exploring this territory for a longer period,” Weber was quoted by Dow Jones as saying. The ECB must raise rates “quickly and wholeheartedly” once the economy regains momentum, newswire said, citing the interview. Interest Rates The world’s biggest central banks are lowering borrowing costs to combat the worst economic slump since the Great Depression. The Federal Reserve cut its target rate for overnight loans two days ago to a range of zero to 0.25 percent 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 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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