Aug. 30 (Bloomberg) -- European 10-year bond yields held near a three-month low as an Australian hedge fund filed for bankruptcy protection on losses related to a slump in U.S. home loans, prompting speculation global economic expansion will slow.

Debt was also buoyed as Italy became the second nation in the $10.4 trillion euro economy to report a drop in consumer optimism this week, fuelling concern the credit market crisis will crimp growth across the region. European Central Bank President Jean-Claude Trichet said policy makers aren't ``pre- committed'' to raising interest rates next week.

``We still don't know the full extent of the credit market crisis,'' said Jose Garcia-Zarate, a fixed-income strategist in London at 4Cast Ltd. ``People are cautious. Everything in the bond market at the moment is about policy expectations.''

The yield on the benchmark German 10-year bund was little changed at 4.23 percent by 5:06 p.m. in London, after yesterday slipping to a three-month low.

The price of the 4.25 percent security due July 2017, which moves inversely to the yield, fell 0.04, or 40 euro cents per 1,000-euro ($1,367) face amount, to 100.11. The two-year note yield was unchanged at 3.98 percent.

Sydney-based Basis Yield Alpha Fund said U.S. home-loan defaults had wrecked the value of its debt holdings. Yesterday, a London-based hedge fund also said it may be forced to sell assets backing a $6 billion commercial paper program.

The Basis Yield fund, which filed for protection in New York yesterday, is run by Basis Capital Fund Management Ltd.

Companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets including U.S. subprime mortgages.

Conditions Worsening

The so-called structured investment vehicles need to sell as much as $43 billion of assets as their access to money dries up, Tom Jenkins, an analyst in London at Royal Bank of Scotland Group Plc, wrote in a report released yesterday.

Standard & Poor's said business conditions for securities firms are worse than in the second half of 1998 when trading revenue slumped 31 percent after Russia's debt default. Revenue from investment banking and trading could fall 47 percent in the final six months of this year, the ratings company said.

The Rome-based Isae Institute's index slipped to 106.5, the lowest since April 2006, and compared with the median forecast of 106.7 by economists surveyed by Bloomberg News. That followed separate surveys this week showing the crisis in credit markets is hurting business and consumer confidence in Germany.

Confidence Hit

A report tomorrow may show retail sales growth in the $2.9 trillion German economy, the largest in Europe, fell in July, the median forecast of 26 economists polled by Bloomberg shows.

``The recent financial-market turmoil has had an impact on consumer confidence,'' said Annamaria Grimaldi, an economist at Intesa Sanpolo SpA in Milan.

The ECB will decide on whether to raise rates from 4 percent on Sept. 6. Trichet, speaking on Aug. 27, avoided the phrase ``strong vigilance'' on inflation, which he's used previously to signal increases in borrowing costs.

European retail sales rose for the first time in four months in August after unemployment fell to a record low, the Bloomberg purchasing managers index showed. The index, based on a survey of more than 1,000 executives compiled for Bloomberg LP by NTC Economics Ltd., rose to a seasonally adjusted 51 from 46.2 in July. A reading above 50 indicates expansion.

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

Last Updated: August 30, 2007 12:14 EDT