By Lukanyo Mnyanda Nov. 16 (Bloomberg) -- European 10-year government bonds rose before a report economists say will show consumer prices in the region dropped, fueling speculation the European Central Bank will maintain stimulus measures to revive the economy. The yield on the German 10-year bund fell from within 2 basis points of its highest level since September. Consumer prices in the 16-nation euro region declined 0.1 percent from a year earlier, the European Union statistics office in Luxembourg will say today, according to economists surveyed by Bloomberg. Government securities rose before sales by Germany, France, Ireland and Spain this week. “The underlying inflation picture is much more positive in the euro zone and that in itself will give plenty of support to the market,” said Marc Ostwald, a strategist in London at Monument Securities Ltd., a broker that counts hedge funds among its clients. “The supply shouldn’t trouble the market too much.” The yield on the bund, Europe’s benchmark government security, fell 5 basis points to 3.33 percent as of 9:20 a.m. in London. The 3.5 percent security traded at 98.91. The yield on the two-year note fell 3 basis points to 1.17 percent. The Frankfurt-based ECB is likely to keep interest rates on hold until the second half of next year, the Financial Times reported Governing Council member Miguel Angel Fernandez Ordonez as saying in an interview. A rate increase “is off the screen,” Ordonez said, according to the newspaper. Stimulus Measures The ECB cut the refinancing rate to a record low of 1 percent, started buying covered bonds and offered banks unlimited cash to help haul the economy out of its worst recession since World War II. The region returned to growth in the third quarter as exports from Germany and France compensated for households’ reluctance to increase spending. It is “imperative” that governments continue implementing agreed stimulus measures next year and start withdrawing them in 2011, when growth should be “self-sustained,” European Economic and Monetary Affairs Commissioner Joaquin Almunia said at a conference in Vienna today. Policy makers need to remain vigilant and “keep an eye on all risks,” ECB council member Axel Weber said in Frankfurt today. “Consumer confidence declining into the holiday season could put pressure on equities and yields, slightly playing into the seasonal bond rally,” Charles Diebel, head of European rates strategy at Nomura International Plc in London, wrote in a research report today. “The ongoing range trade has yet to resolve itself.” Greek bonds declined for a third day, pushing the 10-year yield to the highest level since July. The notes yielded 151 basis points more than the equivalent bund, the most since July 17. The country’s securities slumped last week after government revisions showed the economy shrank in the third quarter. German bonds returned 1.8 percent since June 30, compared with a 2.1 percent gain for U.S. Treasuries, according to Merrill Lynch & Co. indexes. French bonds made investors 2.2 percent in the same period. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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