April 4 (Bloomberg) -- European government notes fell this past week after the region’s central bank reduced its key interest rate by less than economists predicted and the Group of 20 leaders agreed on measures to counter the global recession.

The decline pushed the yield on the two-year German note to the highest level in almost two months. The European Central Bank lowered its main refinancing rate on April 2 by 25 basis points to 1.25 percent, less than the 50 basis-point cut predicted in a Bloomberg News survey. The G-20 pledged more than $1 trillion in emergency aid to cushion the global economy from further financial turmoil.

“The repercussions of the G-20 meeting are still reverberating around the fixed-income markets,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks and institutional investors. “That’s keeping investors on the defensive today.”

The yield on the two-year note, which is most sensitive to interest-rate expectations, rose 16 basis points to 1.47 percent by 4 p.m. in London, the highest level since Feb. 10. The 1.25 percent security due March 2011 fell 0.32, or 3.2 euros per 1,000-euro ($1,342) face amount, to 99.57.

The yield on the 10-year German bund, Europe’s benchmark government security, climbed 11 basis points to 3.20 percent. Yields move inversely to bond prices.

The MSCI World Index of stocks posted its fourth weekly advance, sapping demand for fixed-income assets.

ECB President Jean-Claude Trichet said April 2 policy makers are ready to lower their benchmark rate further. The ECB is slowing the pace of interest-rate cuts as council members seek agreement on what new measures to take next as rates approach zero. The Federal Reserve, Bank of England and Bank of Japan are pumping money into their economies by buying government and company debt.

‘Benefits Offset’

“Virtually all the benefit of the rate move was offset by the market reaction in bond yields,” Charles Diebel, head of European rate strategy in London at Nomura International Plc, wrote in a research note yesterday. “This leaves us wondering whether we might not get more at the ECB’s May meeting than the market reaction yesterday would imply.”

German bonds lost investors 0.3 percent this year, compared with a 1.7 percent decline for Treasuries, according to Merrill Lynch & Co.’s German Federal Governments and U.S. Treasury Master indexes.

Borrowing costs for so-called peripheral euro-region countries narrowed relative to Germany’s. The difference in yield, or spread, between Irish and German 10-year government bonds fell to 211 basis points from 226 basis points on April 2. The Spanish-German spread narrowed to 95 basis points from 101 basis points.

Those spreads will keep narrowing, according to ING Groep NV, the biggest Dutch financial-services company.

“Our favorites here are the high beta plays into Greece and Ireland in the 10-year or into Italy in the 30-year,” Padhraic Garvey, head of investment-grade debt strategy in Amsterdam at ING, wrote in a report today.

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

Last Updated: April 4, 2009 02:30 EDT