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U.K. Gilts Rise for Second Day as Output Falls; Pound Advances

U.K. gilts advanced for a second day after a government report showed the nation’s manufacturing output declined more than economists forecast in October, boosting demand for safer assets.

Two-year yields dropped to a record low as stocks declined amid growing pessimism over a summit of European leaders starting tomorrow in Brussels. U.K. debt was also supported by speculation investors will reinvest coupon earnings due today. The pound strengthened against all its 16 major counterparts.

“Gilts remain well-supported by haven bids given uncertainty about the euro debt crisis and the ratings outlook of AAA countries in the region,” said Vatsala Datta, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “The flow of coupon payments will also help. We have a constructive view on gilts compared with other markets.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 2.23 percent at 4:31 p.m. London time after declining 10 basis points yesterday. The 3.75 percent bond due September 2021 rose 0.175, or 1.75 pounds per 1,000-pound ($1,569) face amount, to 113.225.

The two-year rate was little changed at 0.38 percent after dropping to 0.346 percent, the lowest since Bloomberg began tracking the data in 1992.

Factory output slid 0.7 percent from September, the Office for National Statistics said. Economists forecast a decline of 0.3 percent, according to a Bloomberg News survey.

Growth Slows

U.K. economic growth slowed in the three months through November, the National Institute of Economic and Social Research said. Gross domestic product probably rose 0.3 percent, less than the 0.4 percent estimated for the quarter through October, the institute said in an e-mailed statement.

The Stoxx Europe 600 Index slid 0.1 percent, and the U.K.’s FTSE 100 Index dropped 0.4 percent.

Coupon payment due today will total 7.37 billion pounds, according to the Debt Management Office.

An auction of 900 million pounds of 1.25 percent inflation-protected gilts due in 2032 drew demand for 2.03 times the amount on offer, compared with a bid-to-cover ratio of 1.97 times in the previous sale in January.

Gilts underperformed benchmark bunds after demand increased at a German five-year note auction.

Germany sold 4.09 billion euros ($5.47 billion) of the securities. The nation received bids for 8.67 billion euros, more than the maximum sales target of 5 billion euros. The notes were sold at a yield of 1.11 percent.

Annual Return

Gilts have returned 15 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt rose 7.3 percent and Treasuries gained 8.9 percent.

The pound strengthened against the euro after Germany rejected proposals to combine the current and permanent euro-area rescue funds and the government said it was more pessimistic about the outcome of a European Union leaders’ summit beginning tomorrow.

Sterling appreciated 0.6 percent to 85.37 pence per euro, and rose 0.5 percent to $1.5689.

Sterling has gained 2.2 percent in the past three months trailing behind only the dollar and yen according to Bloomberg Correlation-Weighted Indexes, which track the 10 developed-nation currencies.

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