U.K. Bonds Snap Two-Day Gain as Equity Gains Damp Safety Demand

U.K. government bonds snapped a two- day gain as equity markets advanced, damping the appeal of fixed-income assets as a haven.

Gilts pared their drop after Italian Prime Minister Silvio Berlusconi failed to muster an absolute majority in a routine parliamentary ballot, fueling further calls for him to resign. The FTSE 100 Index of U.K. shares rose as much as 1.9 percent, its biggest intraday gain since Oct. 27, as a report showed U.K. manufacturing expanded in September more than economists predicted.

“There’s some anticipation that Berlusconi may resign soon and that may be positive for the risk-on move, which may reduce the safe-haven demand for gilts,” Vatsala Datta, an interest- rate strategist at Lloyds Bank Corporate Markets in London, said before the vote.

The 10-year gilt yield was little changed at 2.27 percent at 5:11 p.m. London time, after rising to 2.33 percent. The 3.75 percent bond due September 2021 fell 0.035, or 35 pence per 1,000-pound ($1,609) face amount, to 112.995. Two-year yields were little changed at 0.52 percent after reaching 0.55 percent. The FTSE 100 Index (UKX) gained 1 percent.

Factory output in the U.K. increased 0.2 percent from the previous month, when it fell 0.3 percent, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was for a 0.1 percent gain.

U.K. stocks climbed for the first time in three days as companies from Vodafone Group Plc to Marks & Spencer Group Plc rallied after reporting earnings. Vodafone boosted its full-year adjusted operating profit forecast to 11.4 billion pounds to 11.8 billion pounds.

Gilts have returned 14 percent this year, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. German bunds rose 8.7 percent and Italian securities lost 8.2 percent.

The pound was little changed at 85.78 pence per euro. It appreciated to 85.48 pence on Nov. 1, the strongest level since Oct. 4. Sterling was 0.1 percent stronger at $1.6075, after reaching $1.6113 earlier, the most since Oct. 31.

The U.K. currency gained 0.5 percent in the past week, according to Bloomberg Correlation-Weighted Indexes, which track the currencies of 10 developed nations.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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