Sept. 5 (Bloomberg) -- U.K. government bonds posted a weekly decline as reports added to signs that the worst of the global recession is passing, reducing demand for the safety of fixed-income assets.

The declines pushed the yield on the 10-year gilt to the highest level in three weeks yesterday as data showed U.S. employers cut fewer jobs in August than economists forecast. A report this week showed U.K. services industries expanded at the fastest pace in almost two years. Demand declined at two bond auctions amid speculation record supply will make it harder for the government to find buyers as the economy recovers.

“Risk appetite is still the main driver,” said Karsten Linowsky, a fixed-income strategist in Zurich at Credit Suisse Group AG, the largest Swiss bank by market value. “The supply issue will play a bigger part in the months ahead.”

The yield on the 10-year gilt increased 7 basis points in the week to 3.62 percent as of 5:40 p.m. in London yesterday, after earlier climbing to 3.69 percent, the highest since Aug. 14. The yield on the two-year gilt was at 0.91 percent, from 0.86 percent on Aug. 28.

The 10-year gilt yield may reach 3.8 percent by the end of the year, Linowsky said. The median of nine economists and strategists’ forecasts compiled by Bloomberg is for 3.83 percent.

The pound posted its first weekly gain in five versus the dollar, trading at $1.6392, from $1.6270 a week earlier. It strengthened to 87.29 pence per euro, from 87.89 on Aug. 28.

U.S. Employers

U.S. employers cut 216,000 jobs in August, fewer than forecast, after a 276,000 drop in July, the Labor Department said yesterday. Canada recorded a surprise job gain, the first in four months, Statistics Canada data showed.

An index of U.K. services, based on a poll of purchasing managers, increased to 54.1 last month, the highest level since September 2007, a survey by the Chartered Institute for Purchasing and Supply and Markit Group Ltd. showed on Sept. 3. The index was forecast to rise to 54, according to a Bloomberg survey of 28 economists.

Lloyds Banking Group Plc’s Halifax division will probably say next week that U.K. house prices rose for second month in August, according to a Bloomberg survey of economists.

‘Pound is Benefiting’

“The pound is benefiting,” said Neil Jones, head of European hedge fund sales in London at Mizuho Corporate Bank Ltd. “The data is getting less bad, which means more risk appetite.”

The FTSE 100 Index of stocks gained 1.2 percent yesterday, its biggest gain in two weeks. The FTSE 350 Banks Index rose 1.6 percent, cutting its weekly drop to 3.7 percent

While data are indicating a recovery in the economy, the U.K. is trying to sell a record amount of debt to plug holes in its finances. The government, which is planning to raise 220 billion pounds this fiscal year, may boost sales to 237 billion pounds in the fiscal year ending 2011, according to Citigroup Inc.

Demand declined at a government sale of 2.25 billion pounds of bonds maturing in 2039 on Aug. 3, with investors bidding for 1.62 times the amount of securities on offer, compared with a so-called bid-to-cover ratio of 1.75 times at a sale on July. 2. Demand also fell at a sale of 5 billion pounds of three-year securities a day earlier.

British government bonds returned 0.3 percent this year, compared with 13 percent in 2008, according to Merrill Lynch’s U.K. Gilts Index. German bonds climbed 1.3 percent, while U.S. Treasuries lost 2.8 percent, Merrill indexes show.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: September 5, 2009 02:30 EDT