European 10-year bonds logged their biggest two-day decline in eight years after Federal Reserve Chairman Alan Greenspan said the U.S. economy is poised to accelerate, damping demand for fixed income assets.

The speech came three weeks after the Federal Reserve cut interest rates, citing a risk of deflation.

``The past couple of days have been very, very hard,'' said Stefan Amenda, who helps oversee the equivalent of $1.6 billion at Activest Institutional Investment in Munich. ``The deflation story is now out of the equation and yields may well head higher.''

The German 3 3/4 percent bund due July 2013 fell 0.47, or 4.7 euros per 1,000-euro ($1,130) face amount, to 97.35 at 9:24 a.m. in London as its yield rose 6 basis points to 4.08 percent, after jumping 13 basis points yesterday. It's the biggest two-day decline for a security with 10 years to run until maturity since June 1995. A basis point is 0.01 percentage point.

Rising stock prices and low interest rates have reduced financing costs for consumers and businesses, Greenspan said in his biannual monetary report to Congress. Combined with tax cuts, the improving financial conditions ``should bolster economic activity over coming quarters,'' he said. The Standard & Poor's 500 index has risen almost 14 percent this year.

The rate on the Euribor interest rate futures contract for September rose as much as 3 basis points to 2.07 percent. That suggests investors are scaling back speculation the European Central Bank may cut its key lending rate, currently at 2 percent, by then.

`High-Water Mark'

Bill Gross, who runs the world's biggest bond fund, said June was probably the ``high-water mark'' of a 3 1/2 year bond rally as U.S. interest rates at a 45-year low rekindle global growth and stop inflation from slowing.

``The high tide for bond investors has already taken place,'' Gross wrote in a monthly comment on the Web site of Pacific Investment Management Co., which has $350 billion under management and is a unit of Allianz AG, Europe's largest insurer.

Greenspan said low overnight interest rates would be enough to revive the economy and that it was unlikely the Fed would take ``unconventional'' steps such as buying Treasuries to push down borrowing costs. The speech surprised some investors because it came three weeks after the Fed cut its key interest rate to 1 percent, the lowest since 1958, citing a risk of deflation.

``Bond investors around the world will feel betrayed by Greenspan,'' said Michael Derks, chief global strategist at Commonwealth Bank of Australia, ``He seems to have done a Damascene conversion to the growth story -- he has completely changed course in a short space of time.''

Welteke

Ernst Welteke, a European Central Bank council member and president of the Bundesbank, said he expects ``positive economic developments'' in Germany for the coming year, Bild Zeitung reported, citing Welteke.

Welteke considers the country's low interest rates and price stability a sign of ``better growth'' for 2004, the paper said.

Welteke said another interest rate cut was unlikely because it probably would not stimulate the economy, Bild Zeitung said.

Growth in Europe's economy may pick up later this year after possibly stalling in the second and third quarters, the European Union has said. The Germany economy, which accounts for about a third of the euro region's gross domestic product, is struggling to grow after shrinking in the first three months.