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Gilts Decline as Stocks’ Advance Saps Demand for Safest Assets

U.K. 10-year government bonds declined, snapping three days of gains, as advancing stock markets across Europe sapped demand for the perceived safety of fixed-income assets.

Two-year gilts also declined for the first time in almost a week as the government auctioned 3.75 billion pounds ($5.5 billion) of 10-year securities, part of 185.2 billion pounds of planned sales this fiscal year to help finance the biggest budget deficit among the Group of Seven nations. The pound rose against the dollar, reversing an earlier decline.

“There is a bit of a reversal of the risk-aversion trade,” said Elisabeth Afseth, an analyst at Evolution Securities Ltd. in London. “The 10-year area underperformed a bit” amid today’s auction, she said.

The 10-year gilt yield climbed five basis points to 3.52 percent as of 4 p.m. in London. The yield dropped to 3.448 percent yesterday, the lowest since October 14. The 4.75 percent security due 2020 fell 0.39, or 3.9 pounds, per 1,000-pound face amount, to 110.08. The two-year note yield was two basis points higher at 0.81 percent.

The extra yield investors demand to hold 10-year gilts instead of the two-year notes widened to 271 basis points, the most since May 27. The spread with 10-year German bunds was at 96 basis points, near the most since May 10, according to closing generic Bloomberg prices.

Bank of England

The pound gained 0.6 percent to $1.4561, rebounding from as low as $1.4347 yesterday, the lowest level since May 26. It was up 0.1 percent at 82.69 pence per euro.

The Bank of England will keep the benchmark interest rate at 0.5 percent when it announces its decision tomorrow, according to all 61 economists polled by Bloomberg. A separate poll predicted that the bank would hold its asset-purchase plan at 200 billion pounds.

There was “some cautiousness ahead of the new 10-year gilt auction,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors.

Gilts returned 5.2 percent this year, compared with a 7.3 percent increase for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The pound fell earlier as a U.K. index of hiring for permanent jobs released today grew at the slowest pace in four months in May, adding to signs the economic recovery may flounder and strengthening the case for the central bank to keep interest rates at a record low as the government cuts spending.

‘What Lies Ahead’

“Given what lies ahead in fiscal policy, this increases the likelihood of rates of staying lower for longer,” said Kenneth Broux, a senior market economist at Lloyds Banking Group Plc in London.

The employment index from KPMG LLP and the Recruitment and Employment Confederation showed that the number of job candidates fell for the first time in more than two years. The index of full-time placements fell to 61.3 from 63.2 in April, the lowest since January.

Britain’s currency fell this year partly on concern that attempts to cut the budget shortfall, which soared to 11.1 percent of gross domestic product in the year through March, will hinder the U.K.’s recovery after the worst financial crisis since World War II. The U.K. will probably grow 1.2 percent this year, lagging behind a 3.2 percent expansion in the U.S., according to Bloomberg surveys of economists.

Prime Minister David Cameron earlier this week laid the ground for the June 22 emergency budget in which Chancellor of the Exchequer George Osborne will set out the overall reductions needed to tackle the deficit.

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