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Gilts Fall as Stock Gains Damp Safety Demand; Pound Strengthens

Gilts fell, extending the biggest weekly decline in three months, as gains in European stocks curbed demand for the relative safety of government debt.

Benchmark 10-year yields approached the highest level since August amid speculation the Group of 20 nations will take additional steps to counter Europe’s debt crisis including giving the International Monetary Fund more resources. The pound extended weekly gains versus the dollar and the yen.

“Some of the despair in equity markets has eased up a bit so investors are taking some of their chips off the fixed income table and looking at riskier asset classes,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “People are also feeling a little less gloomy about the political situation in Europe towards the debt crisis, even though the economic picture doesn’t look too good.”

The 10-year gilt yield rose five basis points, or 0.05 percentage point, to 2.61 percent at 4:47 p.m. London time, after climbing to 2.67 percent on Oct. 13, the highest since Aug. 9. The 3.75 percent security due September 2021 fell 0.48, or 4.8 pounds per 1,000-pound ($1,578) face amount, to 109.875. The rate climbed 14 basis points this week, the most since the period ended July 1.

Finance ministers and central bankers from the G-20, who started a two-day meeting today in Paris, are said to be putting together a rescue plan for the region. European leaders may complete the plan at an Oct. 23 summit to present to a gathering of G-20 chiefs on Nov. 3-4.

Shares Gain

European shares rallied on optimism the plan will help contain the sovereign debt crisis. The Stoxx Europe 600 Index rose 0.8 percent and the FTSE 100 Index gained 1.2 percent.

The pound appreciated 0.3 percent to $1.5807, after climbing to a four-week high of $1.5853, the strongest since Sept. 15. Sterling strengthened 0.8 percent to 122.27 yen. It fell 0.4 percent to 87.69 pence per euro.

Gilts declined even after Standard & Poor’s cut Spain’s credit rating by one level yesterday to AA-, the fourth-highest investment grade. It was the third downgrade in three years.

U.K. debt extended losses after a U.S. report showed retail sales rose more in September than economists forecast. Sales increased 1.1 percent, the most since February, the Commerce Department said in Washington.

Annual Return

U.K. government debt has returned 11 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The securities have been boosted as the euro-area crisis drove investors to safer investments, Prime Minister David Cameron pursued austerity measures amid a growth slowdown and the Bank of England resumed government debt purchases to cap borrowing costs.

The central bank increased the size of its bond purchases last week, expanding the program to 275 billion pounds from 200 billion pounds, the biggest increase since the first round of so-called quantitative easing, which began in March 2009.

Policy makers “could well decide” to expand the program again, the Guardian newspaper quoted Bank of England deputy governor Charles Bean as saying in an article yesterday.

The pound has lost 1.4 percent in the last six months and 3.1 percent in the past year against a basket of its nine most-traded peers as measured by Bloomberg Correlation Weighted Currency Indexes.

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