July 27 (Bloomberg) -- German two-year government notes declined for a fourth day after a report showed consumer confidence in Europe’s largest economy rose more than forecast, adding to signs the recession is easing.

The losses pushed the yield on the securities to the highest level since June 30. GfK AG’s German sentiment index for August increased to 3.5, from a revised 3 for July. The median forecast of economists surveyed by Bloomberg was for the index to hold at 2.9. Bunds also declined as Europe’s Dow Jones Stoxx 600 Index of shares gained and Belgium sold 2.1 billion euros ($3 billion) of bonds. Italy and Holland are scheduled to sell debt tomorrow.

“There is more optimism about the economy and that’s adding to the bearish outlook for bonds,” said David Schnautz, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “The rally in stock markets is still in place and this limits the upside for bunds.”

The yield on the two-year note rose 4 basis points to 1.36 percent as of 5:02 p.m. in London. The 1.5 percent security due June 2011 fell 0.07, or 70 euro cents per 1,000-euro face amount, to 100.25. The 10-year bund yield was little changed at 3.49 percent.

The Stoxx 600 climbed 0.4 percent, down from as much as a 0.9 percent. Government bonds pared losses as stock markets trimmed their gains.

Bund Performance

Bunds dropped last week amid better-than-forecast economic data and improved earnings from companies including Vodafone Group Plc to Roche Holding AG. Continental AG, Europe’s second- biggest tiremaker, said July 20 it restored profit after two quarters of losses. Deutsche Bank AG, Germany’s biggest lender, may report a second straight quarterly profit when it publishes its results tomorrow, according to a survey of analysts by Bloomberg.

The difference in yield, or spread, between two- and 10- year bonds narrowed 3 basis points to 212 basis points. The narrower spread indicated investors were reducing holdings of the shorter-dated notes, which are perceived to be safer. after the European Central Bank cut its benchmark interest rate to a record low of 1 percent, lent unlimited funds to banks and started buying 60 billion euros of covered bonds to stem the worst recession since World War II.

The region’s central banks bought a total of 2.9 billion euros of covered bonds so far, the ECB said today. The purchases, posted in a daily market notice, were up from 2.86 billion euros reported on July 24. The ECB reports purchases one working day after they have settled.

Record Debt

Belgium sold securities maturing in 2012, 2015 and 2019. The 4 percent securities maturing in 2019 were priced to yield an average 3.933 percent, compared with 4 percent when they were sold in May.

European bonds declined this year as governments sold record amounts of debt to fund stimulus packages and plug holes in their finances amid the worst recession since World War II. Sovereign debt sales in the euro region will reach 869.2 billion euros this year, according to ING Groep NV.

Less than six months after dumping the downgraded debt of Greece and Ireland, investors are piling back in, sparking the best bond returns in Europe.

Greece’s bonds earned 8.1 percent this year, the most in the region, making them a “top pick” for Deka Investment GmbH. HSBC Holdings Plc recommends Italy, whose notes gained 4.1 percent. DWS Investment GmbH is buying Irish securities, which jumped 4.7 percent since March.

German government bonds lost 0.2 percent this year, compared with a 4.8 percent decline for U.S. Treasuries, according to Merrill Lynch & Co. indexes.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: July 27, 2009 12:17 EDT