European Bonds Rise on Morgan Stanley Losses, Stock Declines

European two-year government notes advanced the most in a week as stocks fell after Morgan Stanley booked losses on subprime mortgage-related assets and said the outlook for credit markets is bleaker than in September.

The difference in yields, or spread, between two- and 10- year German bonds was near the widest in four weeks as investors bought safer short-dated notes. The spread widened further after the European Central Bank decided not to raise interest rates today, increasing the appeal of the shorter-dated debt.

``Bonds are likely to remain well supported in the near term,'' said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA, France's second-biggest bank. ``The market is still being plagued by uncertainty and mistrust.''

The yield on the two-year note fell 6 basis points to 3.85 percent by 3:14 p.m. in London. The price of the 4 percent note due September 2009 rose 0.10, or 1 euro per 1,000-euro ($1,467) face amount, to 100.24.

Morgan Stanley, the second-biggest U.S. securities firm, said late yesterday it lost $3.7 billion in the two months through October on subprime mortgage-related securities. Merrill Lynch & Co. and Citigroup Inc. have also booked losses related to the subprime-mortgage crisis in the past two weeks.
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