Dec. 27 (Bloomberg) -- German notes rose, pushing the rate on two-year notes to less than 0.2 percent for the first time, as investors sought the safest assets before Italy auctions as much as 20 billion euros ($26.2 billion) of debt.

Italian benchmark debt held three days of declines. German bonds snapped a two-day drop after International Monetary Fund Managing Director Christine Lagarde said the world economy is in danger because of Europe’s financial woes. Dutch and Finnish note yields also fell. Italy plans to sell 9 billion euros of 179-day bills and as much as 2.5 billion euros of zero-coupon notes due in 2013 tomorrow. It will offer bonds due between 2014 and 2022 on Dec. 29.

“The auction will be quite a big event,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “It will continue to drive Italian yields higher and will have an effect on bunds with a flight to quality.”

The yield on two-year German notes dropped six basis points to 0.17 percent at 4:50 p.m. London time, after reaching 0.158 percent, the least since Bloomberg began collecting the data in 1990. The 0.25 percent security due December 2013 rose 0.115, or 1.15 euros per 1,000-euro face amount, to 100.16.

Italian 10-year note yields were two basis points higher at 7 percent. The additional yield investors demand to hold the benchmark securities instead of German bunds widened to as much as 520 basis points, or 5.2 percentage points, the most since Nov. 17.

Euro Crisis

German government bonds have rallied this year as Europe’s debt crisis stoked demand for the region’s safest fixed-income investments. The debt has handed investors a profit of 8.9 percent this year, the most since 2008, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Italian debt lost 5.9 percent, and Greek securities dropped 63 percent, the indexes show.

Europe has made progress in tackling the financial woes but needs to speed up the implementation of crisis-fighting measures, Lagarde said in an interview with Le Journal du Dimanche. The U.S. is already being affected and growth forecasts for China, Brazil and Russia are also being lowered, she told the newspaper.

Spanish government debt advanced today even after Economy and Competition Minister Luis de Guindos said yesterday in Madrid the nation’s economy has suffered a “relapse” and will contract as the People’s Party takes over the nation’s finances from the Socialists. “The next two quarters aren’t going to be easy,” he said.

Spanish Debt

Two-year Spanish note yields dropped 12 basis points to 3.58 percent and the rate on 10-year debt slipped four basis points to 5.33 percent.

Germany’s government is revising its forecast for 1 percent economic growth in 2012 and will present a lower figure in mid- January, Focus magazine reported yesterday, without citing anyone.

The nation’s economy ministry denied the Focus report, saying no decision has been made. An analysis of potential growth is still ongoing, a spokeswoman said in an e-mailed statement, declining to be identified, citing ministry policy.

The yield on Finland’s two-year notes slid as much as eight basis points to 0.35 percent and Dutch two-year note yields plunged 11 basis points to 0.22 percent.

Euribor futures also rose, pushing the implied yield on the December 2012 contract eight basis points lower to 0.91 percent, a sign investors were adding to bets for lower borrowing costs.

The European Central Bank last week lent 523 banks 489 billion euros for three years in its latest attempt to keep credit flowing to the economy.

--Editors: Mark McCord, Guy Collins

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net