Aug. 31 (Bloomberg) -- European government bonds rose for a second day, pushing yields to near a record low, on concern soaring oil prices will crimp the outlook for economic expansion in the euro region.

The benchmark German 10-year bund yield has dropped 14 basis points this month on views oil near a record will reduce spending and erode sentiment among consumers in the region's $9.4 trillion economy. Sales at German retailers unexpectedly fell last month, a government report showed today.

``Bonds continue to look attractive in Europe given where yields are,'' said Juergen Jann, a Munich-based fund manager at Pacific Investment Management Co., the world's biggest bond fund. ``The high oil price will be harmful for European growth.''

The yield on the German bund fell 5 basis points, or 0.05 percentage point, to 3.096 percent by 3:14 p.m. in London, its lowest since July 7 when it reached a record 3.08 percent.

The price of the 3 1/4 percent bund due July 2015 rose 0.40, or 4 euros per 1,000-euro ($1,221) face amount, to 101.27, according to Merrill Lynch & Co. Bond yields move inversely to prices.

Yields reached their low today after a regional U.S. factory index fell more than expected in August. The gauge that measures manufacturing in the Chicago area slid to 49.2 from 63.5 in July, the National Association of Purchasing Management-Chicago said.

Retail sales in Germany, Europe's largest economy, dropped an adjusted 0.6 percent from June, when they fell 0.7 percent, the Federal Statistics Office said. Economists expected sales, which make up 4 percent of gross domestic product, to rise 0.4 percent in July, a Bloomberg survey showed. From a year ago, sales fell 3 percent.

Oil for October delivery rose for a third day, gaining as much as 1.2 percent to $70.63 a barrel in after-hours electronic trading on the New York Mercantile Exchange. Yesterday it reached a record $70.85.

ECB Meeting

European Central Bank policy makers meet tomorrow, when they will keep their interest rate at a two-year low of 2 percent, according to all 33 economists surveyed by Bloomberg.

Interest-rate futures suggest traders see no change in the Frankfurt-based ECB's benchmark rate this year. The yield on the contract due in December fell 1 basis point to 2.16 percent.

Three-month Euribor, the euro interbank offered rate, since 1999 has averaged about 15 basis points more than the ECB's benchmark rate.

The euro-area economy will probably expand about 0.4 percent in the current quarter and about 0.6 percent in the final three months of the year, unchanged from an Aug. 11 forecast, according to the Brussels-based European Commission.

ECB Forecast

The ECB has raised its growth forecast to 1.5 percent for 2005, from a previous estimate of 1.4 percent, Market News International reported today. The central bank doesn't expect inflation to drop below 2 percent, its target, before the middle of next year, the news agency added.

Inflation in the dozen nations using the euro slowed in August, Eurostat, the European Union's statistics office said in a separate report. Consumer prices rose 2.1 percent from a year ago in the region, below the 2.2 percent increase of July.

Gains in bonds may be limited on signs of improving labor markets in Germany and France. German unemployment fell for a fifth month in August, the Federal Labor Agency said today. The jobless rate in France unexpectedly dropped in July to the lowest in almost two years, the Labor Ministry in Paris said.

A report two days ago showed consumer confidence in Germany improved for the first month in five, according to a survey by GfK, the country's largest market research company.

Increased optimism this month matches that of investors, whose confidence reached a 17-month high, according to a ZEW report Aug. 23. German companies, with the exception of retailers, also said they expect business to improve in the next six months, the Munich-based Ifo institute reported Aug. 25.

To contact the reporters on this story: Jake Lee at jlee127@bloomberg.net

Last Updated: August 31, 2005 10:26 EDT