March 31 (Bloomberg) -- European government bonds posted their biggest back-to-back weekly decline in three months as economic reports have fueled expectations the region's central bank will raise interest rates further.

Two-year bond yields have climbed to the highest in two months on signs of sustained economic expansion in the 13-member euro region. European Central Bank President Jean-Claude Trichet this week said growth in the $10.4 trillion economy is ``broader and sustained'' and leaves ``no time for complacency'' on inflation. Traders boosted bets he will lift borrowing costs.

``Trichet made it very clear this week the euro region economy is growing at a brisk pace and the ECB has much more work to do in terms of tightening,'' said Jose Garcia-Zarate, a fixed- income strategist at 4Cast Ltd. in London. ``The fundamentals clearly support the notion of higher rates and taking that into account, yields should go up.''

The yield on the two-year note rose 4 basis points in London this week to 4 percent, its highest since Jan. 29. The price of the 3.75 percent bond due March 2009 fell 0.02, or 0.2 euros, per 1,000 euro ($1,334) face amount, to 99.55.

German 10-year bunds outperformed two-year notes this quarter, returning investors 0.8 percent, according to an index of the securities compiled by Merrill Lynch & Co. Two-year notes gave investors a return of 0.5 percent in the three months through March, the indexes showed.

Yields surged this week after reports showed consumer confidence unexpectedly rose and inflation accelerated in Germany, and the ECB said money supply growth in the euro region quickened to the fastest pace in 17 years.

Optimistic Consumers

Economic reports today may add to the case for higher borrowing costs. Euro-region inflation quickened to an annual rate of 1.9 percent in March, matching expectations in a Bloomberg News survey. The European Commission's index of consumer sentiment in the euro region also rose to -4 in March from -5 in February.

European two-year notes have outperformed 10-year debt, reflecting investors' concern inflation may accelerate.

The yield gap, or spread, between two-year and 10-year debt widened to 6.2 basis points yesterday, the biggest difference in almost four weeks. That has steepened the yield curve, a chart of bonds of the same quality but different maturities.

``Even though interest rates are rising, rates are still very low in real terms,'' said Susana Garcia-Cervero, senior economist at Deutsche Bank AG in London.

ECB council member Erkki Liikanen told reporters today rates are ``moderate and on the accommodative side.''

Interest-rate futures indicate investors raised wagers the ECB will raise borrowing costs. The yield on the three-month Euribor futures contract for September has increased 11 basis points this month to 4.18 percent.

The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net;

Last Updated: March 31, 2007 02:52 EDT