Oct. 13 (Bloomberg) -- Bonds around the world dropped as government plans to support banks hurt by the credit crisis stoked demand for higher-yielding assets and investors bet the rescue packages will increase states' debt burdens.

The declines pushed 10-year gilt yields up the most since January 2000 while yields on German two-year notes rose from the lowest in more than 2 1/2 years. The December U.S. Treasury futures contract climbed to its highest level since July. Bond markets in Japan and the U.S. were closed today for public holidays

The Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem a market panic and the Federal Reserve with other central banks said today they will offer financial firms unlimited dollar funds. Euro-area leaders agreed at the weekend to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat. The U.K. government said today it will sell 37 billion pounds ($64 billion) of debt to fund its bailout for banks.

``We've only just seen the start,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment- banking arm of Credit Agricole SA. ``Governments are going to be selling bonds hand over fist. There's going to be a lot of supply and that will put bonds under pressure.''

Stocks in the U.S., Europe and Asia rose and the euro advanced by the most in three weeks against the dollar after leaders of the 15 nations that use the single European currency agreed to bail out ``systemically'' key banks in distress.

Stocks Rebound

The MSCI World Index of stocks rebounded from its worst week on record, gaining 6.4 percent today.

The yield on 10-year U.S. futures contracts for December delivery climbed 12 basis points to 4.44 percent as of 4:24 p.m. in London, near the highest since July 25. The German two-year note yield rose 12 basis points to 3.12 percent, after last week falling to 2.87 percent, the lowest level since January 2006. The U.K. 10-year gilt yield advanced 21 basis points to 4.68 percent.

Investors may keep buying bonds on speculation the prospect of a global economic slump will prompt policy makers to cut interest rates further. The Fed and central banks from the European Central Bank to the People's Bank of China lowered borrowing costs on Oct. 8 to calm financial turmoil and unlock the seizure in credit markets.

Futures on the Chicago Board of Trade show odds of 76 percent the Fed will lower its target rate for overnight bank loans by a quarter of a percentage point at its Oct. 29 meeting. The odds were zero a month ago. Traders are still betting the European Central Bank will cut its key refinancing rate by more than 25 basis points next month, according to a Credit Suisse Group index of derivatives.

Futures Bets

The 10-year bund, Europe's benchmark security, yielded 92 basis points more than the two-year note today, near the biggest spread since Aug. 2005, indicating investors are favoring shorter-dated notes, which are perceived as safer and are more sensitive to the outlook for interest rates. The equivalent yield difference in the U.S. was at 223 basis points at the end of last week, the most since April 2004.

``The credit crisis will continue to create volatility in the market and together with a gloomier outlook on the economy, lower yields and a steeper curve continue to be our strategic stance,'' Wilson Chin, a fixed-income strategist at ING Bank NV in Amsterdam, wrote in a client note.

In the U.K., gilts dropped as the Debt Management Office said it will sell debt to fund the bailout of Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc, with the program expected to start the week of Oct. 20. European bonds declined before sales this week by Italy, Belgium, Spain and France.

European bonds handed investors a 1 percent return since the end of September, while U.S. Treasuries returned 0.5 percent, according to Merrill Lynch & Co.'s EMU Direct Government and Treasury. Master indexes

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

Last Updated: October 13, 2008 11:29 EDT