Nov. 6 (Bloomberg) -- The difference in yield between 10- and two-year German government bonds widened to the most in six weeks as investors bet the European Central Bank will keep rates on hold even as evidence mounts of an economic recovery.

The 10-year bund posted a weekly decline after a report showed factory orders in Europe’s biggest economy increased for a seventh straight month. ECB President Jean-Claude Trichet said yesterday policy makers plan to gradually withdraw liquidity measures, even with the economy facing a “bumpy road.” Factory orders grew 0.9 percent in September from August, according to the economy ministry in Berlin, compared with economists’ forecast of 1 percent. The Dow Jones Stoxx 600 Index of European equities snapped a two-week decline, damping demand for bonds.

“The market is torn between two competing macroeconomic impulses, where on the one hand rates will stay low for a long time, and on the other the economy is recovering on a cyclical round,” said Peter Schaffrik, a fixed-income strategist in London at Commerzbank AG, Germany’s second-biggest lender. “Trichet is doing a very good job of straddling those two elements and that’s why the market is where it is.”

The yield on the bund rose 2 basis points to 3.37 percent as of 5:24 p.m. in London, 14 basis points higher in the week. The 3.5 percent security due July 2019 fell 0.17, or 1.7 euros per 1,000-euro ($1,491) face amount, to 101.07. The two-year note yield dropped 3 basis points to 1.27 percent, leaving it 2 basis points lower on the week.

France, Italy

The difference in yield, or spread, between the two- and 10-year securities widened 6 basis points to 210 basis points, the most since Sept. 24.

Other European government bonds fell, with the yield on the French 10-year security rising 2 basis points to 3.65 percent and the Italian 10-year yield adding 2 basis points to 4.13 percent.

The ECB left its benchmark interest rate at 1 percent yesterday, as predicted by economists, while the Bank of England kept its key rate at 0.5 percent, also matching forecasts. The U.S. Federal Reserve kept its funds target rate at between zero and 0.25 percent a day earlier.

“Not all our liquidity measures will be needed to the same extent as in the past” as the economy recovers, Trichet said yesterday in Frankfurt. “The Governing Council will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term.”

U.S. Payrolls

Bunds rose earlier after a report showed U.S. employers cut more jobs in October than forecast, indicating the economy may take longer to recover. Payrolls fell by 190,000 workers last month, compared with a 175,000 drop anticipated in a Bloomberg survey, figures from the Labor Department in Washington showed.

“The jobs data reaffirms what the central banks have said this week, that rates will not be raised for many months,” said Michael Rottmann, head of fixed-income research in Munich at UniCredit Markets & Investment Banking. “Bonds will go sideways from here.”

German government bonds and U.S. Treasuries both handed investors a 0.5 percent loss since the end of September, while U.K. gilts lost 2 percent, Merrill Lynch & Co. indexes showed.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

Last Updated: November 6, 2009 12:48 EST