April 1 (Bloomberg) -- European two-year bonds had their longest losing streak in six years as European economic growth accelerates, fueling speculation the region's central bank will raise interest rates three more times this year.

Benchmark two-year debt has fallen for seven straight months, pushing yields to the highest in more than three years, as reports showed optimism in Germany and Italy, Europe's biggest and fourth-biggest economies, is at its highest in 15 and five years respectively. At least eight banks have this month lifted their forecasts for the ECB's benchmark rate.

``The economic background is continuing to improve, which allows the ECB to slightly accelerate the rate hike cycle,'' said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. ``The recent deterioration in the market is no surprise, and we expect it to continue.''

The yield on the benchmark German two-year note rose 27 basis points last month to 3.29 percent in London, close to its highest since October, 2002. The 10-year yield gained for a third month, climbing 28 basis points to 3.77 percent.

The price of the 3.5 percent bond due January 2016 fell 2.33 or 23.3 euros per 1,000-euro ($1,215) face amount in March to 97.79. Bond yields move inversely to prices.

Royal Bank of Scotland Group Plc yesterday raised its forecast for the two-year note yield to 3.3 percent by the end of 2006, from 2.7 percent previously. It also raised its year-end estimate on the 10-year bund to 3.6 percent, from 3.1 percent.

Spreads Narrow

The difference in yield, or the spread, between 10-year bunds and similar-maturity U.S. Treasuries narrowed by 10 basis points since October, before the ECB began raising rates. The spread between 10-year bunds and equivalent-maturity Japanese bonds has widened by 32 basis points in that time, indicating European debt underperformed its U.S. and Japanese counterparts.

Confidence among European executives and consumers rose to the highest in almost five years in March, and inflation topped the ECB's ceiling for a 14th month, reports yesterday showed.

A gauge of sentiment among households and companies in the euro region climbed to 103.5 from 102.7 in February, the European Commission said in Brussels. Consumer prices rose 2.2 percent in March from a year ago, the European Union's statistics office said. The bank aims to keep inflation just below 2 percent.

The ECB next meets to decide on monetary policy in the euro region on April 6. It last raised borrowing costs by a quarter- point on March 2 to 2.5 percent.

Rates at `Low Levels'

ECB President Jean-Claude Trichet said March 30 ``nominal and real interest rates have remained at low levels ever since the euro was introduced'' and are ``supportive of the economic recovery in the euro area.''

The French economy expanded at a faster pace than expected in the three months through December, a report yesterday showed. Gross domestic product in the euro region's second-biggest economy grew 0.4 percent from the third quarter, instead of the 0.2 percent initially reported.

European debt of all maturities has this quarter returned investors a loss of 2 percent, including reinvested interest, according to Merrill Lynch & Co indexes. By comparison, gilts have returned investors a loss of 0.5 percent, and Treasuries a loss of 1.2 percent.

Ifo's index of German business sentiment rose to 105.4, its highest since April 1991. The Rome-based Isae Institute's index of Italian business optimism rose to 94.2, a five-year high.

Goldman, Sachs & Co., JPMorgan & Co., Deutsche Bank AG, UBS AG, Dresdner Kleinwort Wasserstein, Lehman Brothers Holdings Inc., Credit Suisse Group and BNP Paribas have all raised their forecasts for the ECB's main rate this month.

Traders raised bets the ECB will lift rates to 3.25 percent by the end of the year, futures prices show. The yield on the three-month Euribor contract due December 2006 rose 28 basis points last month to 3.48 percent. A basis point is 0.01 percentage point.

The contracts, which are traded electronically on the London International Financial Futures Exchange, settle to the three- month euro interbank offered rate, which has averaged 0.16 percentage point over the ECB rate since 1999.

To contact the reporter on this story: Prashant Rao in London at prao3@bloomberg.net

Last Updated: April 1, 2006 02:28 EST