June 23 (Bloomberg) -- European bonds declined as governments in the region sold 19 billion euros ($26.6 billion) of securities and policy maker Axel Weber said the central bank has used up its room to lower interest rates.

The drop sent the yield on the 10-year German bund, Europe’s benchmark security, up from a one-month low as a report showed Europe’s manufacturing and service industries shrank in June at the slowest pace in nine months. The European Central Bank “has used the room for rate reductions that was created by waning inflation risks and a dramatic worsening of the economic situation,” Weber said at an event in Munich today.

“While bonds have retreated, we are still seeing high price levels with governments that continue to issue a lot of debt,” said Philippe-Henri Burlisson, who helps oversee the equivalent of $95 billion at Groupama Asset Management in Paris.

The yield on the 10-year bund rose two basis points to 3.47 percent as of 5:12 p.m. in London. The 3.5 percent security due July 2019 slipped 0.18, or 1.8 euros per 1,000-euro face amount, to 100.26.

The two-year yield, which tends to be more sensitive to interest-rate expectations, extended its decline after Weber’s comments, snapping seven days of losses and advancing three basis points to 1.48 percent. Yields move inversely to bond prices.

Ten-year bunds snapped a two-day gain as GfK AG said its index of German consumer sentiment climbed for a second month and the Paris-based statistics office Insee said its gauge of confidence among French manufacturers gained for a third month. German business confidence improved in June, the Ifo institute in Munich said yesterday.

Nowotny’s Views

A composite index of the service and manufacturing industries for the 16 nations using the euro rose to 44.4, the highest since September, from 44 in May. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates a contraction.

Fellow ECB council member Ewald Nowotny today echoed Weber’s views, saying the bank’s interest-rate cuts and emergency policy measures have created the conditions for an economic recovery. ECB President Jean-Claude Trichet said this month the worst of the recession may be past after the ECB cut interest rates to a record low and pledged to buy covered bonds to fight the crisis.

France sold 6 billion euros of 30-year bonds at a spread of two basis points above existing government debt. Belgium issued 5 billion euros of three-year notes, priced at six basis points below the benchmark mid-swap rate, according to the government’s debt agency.

Ireland sold 6 billion euros of 10-year securities priced to yield 244.3 basis points more than German bunds, according to ING Groep NV, one of the banks that managed the sale. The Netherlands issued 1.9 billion euros of bonds.

‘Hefty Demand’

European governments are using banks to underwrite debt sales in an effort to boost demand for their securities as nations raised borrowing to unprecedented levels to fund bank bailouts and economic growth programs. Issuance in the region will reach 845 billion euros this year, according to ING.

“The three syndicated deals this week have received hefty demand,” fixed-income strategists led by Giuseppe Maraffino at UniCredit Markets & Investment Banking in Milan wrote in a note today.

Germany, Europe’s biggest economy, won’t turn to investment banks to sell its regular debt this year, Carl Heinz Daube, head of the Federal Finance Agency, said today in an interview in London.

“We have the luxury that everyone wants to buy our bonds,” Daube said. “We don’t want to change our winning system, not during the crisis, because it might give a wrong signal to the market.”

Declines in bonds may be limited amid speculation investors will use loans the ECB plans to offer today to buy higher- yielding securities such as government debt.

German bonds returned 0.6 percent this month, compared with a 1 percent loss for U.S. debt, according to Merrill Lynch & Co.’s German Federal Governments and U.S. Treasury Master indexes.

To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net.

Last Updated: June 23, 2009 12:39 EDT