June 9 (Bloomberg) -- German 10-year bunds fell for the first time in four days as the lowest yields in at least 21 years eroded demand for the euro region's safest assets and Europe's biggest economy auctioned new debt. The decrease pushed the bund yield higher after it reached 2.50 percent yesterday, the lowest level since at least 1989. Germany sold an additional 4.63 billion euros ($5.6 billion) of two-year notes at an average yield of 0.47 percent, while increased demand at a Portuguese bond offering stoked optimism that other European nations will be able to fund themselves. "Bunds are pulling back after reaching record low yields," said Orlando Green, an interest-rate strategist at Credit Agricole SA in London. "There's some retracement of the risk aversion that's been a major theme for markets." The yield on the 10-year bund, Europe's benchmark government security, increased three basis points, or 0.03 percentage point, to 2.55 percent at 1:40 p.m. in London. The 3 percent security maturing in July 2020 fell 0.33, or 3.3 euros per 1,000-euro face amount, to 103.88. The two-year note yield rose three basis points to 0.49 percent. The U.K. also sold 3.75 billion pounds of 10-year securities today, while Treasuries weakened before the second of this week's auctions, which total $70 billion. The Stoxx Europe 600 Index advanced for the first time in four days, increasing 1.2 percent. The euro strengthened against the dollar for a second day, gaining 0.2 percent to $1.1997. It fell to $1.1877 on June 7, the lowest level since March 2006. Spreads Narrow The spread between French and German 10-year securities narrowed to 48 basis points after reaching 56 basis points yesterday, the widest since April 2, 2009. The extra yield investors get for holding Portuguese debt instead of bunds was 269 basis points, down from 272 basis points yesterday, which was the most since a 750-billion-euro European rescue plan was announced May 10. Portugal sold 701 million euros of bonds maturing in 2013 and 816 million euros of securities due in 2020. The notes due in September 2013 were issued at an average yield of 3.597 percent. The auction attracted bids for 2.4 times the amount offered, compared with a bid-to-cover ratio of 1.6 at the previous auction of the securities in November 2008. The yield difference between bunds and other euro-area securities had widened on evidence that policy makers hadn't succeeded in damping the debt crisis that began in Greece. "Over the last few days, not only periphery spreads have kept widening, but also core countries' spreads started widening versus Germany," Chiara Cremonesi, a strategist at UniCredit SpA in London, wrote in an e-mailed report. "Today, risk aversion was slightly receding, with periphery spreads tightening slightly and Italy outperforming." Italian Credibility The difference in yield between Italian and German 10-year bonds shrank to 160 basis points after reaching 178 basis points yesterday, the most in more than a decade. The formerly widening spread had signaled investors were losing confidence in the country, former Italian Prime Minister Carlo Azeglio Ciampi wrote in an editorial in Il Messaggero. "It's an important indicator measuring, I am sorry to say, a worsening of the country's credibility," said Ciampi, who is also a former governor of the country's central bank. "An extra point in financing our debt involves a high, painful cost." Global investors have little confidence in Europe's efforts to contain its debt crisis or in ECB President Jean-Claude Trichet, according to a quarterly poll of investors and analysts who are Bloomberg subscribers, with 73 percent calling a default by Greece likely. Only 23 percent say they expect the region's rescue package to both keep the European monetary union together and prevent a debt default by a government, More than 40 percent say Greece is likely to abandon the euro. Europe's 'Cover-Up' Other critics include High Frequency Economics, which said the EU's efforts to halt the spread of the sovereign-debt crisis with a new fund that would provide loans to ailing nations failed to impress investors and is unlikely to succeed, "This strategy of lending more to the already over- borrowed provides no solution other than a short-term cover-up of the underlying problem," Carl B. Weinberg, chief economist of High Frequency in Valhalla, New York, wrote in a report today. "Default, or restructuring over time -- with or without a haircut for creditors -- is what is necessary." Bunds have returned 7.3 percent this year, compared with 4.7 percent for U.S. Treasuries, while Portuguese debt has fallen 3.8 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The U.S. Treasury will sell $21 billion of 10-year notes today, one day after it auctioned $36 billion three-year securities. The Treasury plans to sell $13 billion of 30-year bonds tomorrow. Portuguese, German Auctions Germany planned to sell as much as 6 billion euros of the two-year notes. The Bundesbank retained 1.38 billion euros of securities for secondary-market operations, up from 1.18 billion euros at the initial auction of the same securities on May 12. Investors bid for 2.4 times the amount of German two-year notes on offer, according to the German Finance Agency. That's up from a bid-to-cover ratio of 1.4 at the May 12 auction, which garnered an average yield of 0.62 percent. The two-year note yield fell to 0.427 percent on May 20, the lowest level since at least 1990, according to Bloomberg generic data. Germany also sold 1 billion euros of a 1.75 percent inflation-protected 10-year security at an average yield of 0.86 percent. Investors bid for 1.9 times the amount on offer. The Portuguese securities due in June 2020 were issued at an average yield of 5.225 percent, compared with 4.523 percent at the previous auction of the same-maturity debt on May 12. Today's auction attracted bids for 1.8 times the amount offered, the same bid-to-cover ratio as in May. --With assistance from Lorenzo Totaro in Rome, Rich Miller in Washington, Joao Lima in Lisbon and Paul Dobson in London. Editors: Keith Campbell, .

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