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Gilts Decline for Second Day as Retail Sales Unexpectedly Rise

Gilts declined for a second day after a government report showed U.K. retail sales unexpectedly increased in January, fueling optimism that the economy will avoid a recession.

Sterling strengthened to a three-month high against the yen as the data followed reports this month showing manufacturing returned to growth in January and an expansion in services accelerated. The pound headed for a weekly advance against the euro and the dollar after Bank of England Governor Mervyn King said this week the economy should “gradually” recover this year. U.K. stocks rose for the first time in four days.

“There’s a two-fold pressure on gilts today,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “The general positive tone in markets, with equities rising, and the good retail sales data.”

The 10-year gilt yield climbed five basis points to 2.18 percent at 4:23 p.m. London time. The 3.75 percent bond due in September 2021 fell 0.445, or 4.45 pounds per 1,000-pound ($1,581) face amount, to 113.42.

Retail sales including fuel climbed 0.9 percent from December, when they increased 0.6 percent, the Office for National Statistics said in London. Economists forecast a 0.3 percent decline, according to a Bloomberg News survey.

The FTSE 100 Index of shares climbed 0.3 percent, extending this week’s gain to 0.9 percent.

The pound rose 0.6 percent to 125.43 yen after climbing to 125.71, the strongest level since Nov. 7. The currency was little changed at $1.5807 having risen 0.3 percent this week. Sterling was also little changed at 83.16 pence per euro.

‘Helped the Pound’

“The retail sales data helped the pound, it was surprisingly good,” said Steven Barrow, head of Group of 10 research at Standard Bank Plc in London. “The numbers look genuinely good and may be something that helps the momentum of sterling. It makes me a little bit more positive that growth in the first quarter won’t fall, avoiding a technical recession.”

Sterling has gained 0.5 percent this week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, trimming its decline this year to 0.8 percent.

The pound also advanced this week after the Bank of England revised up its inflation forecasts on Feb. 15, prompting speculation that it won’t expand its bond-buying program. The central bank kept its benchmark interest rate at a record low 0.5 percent and raised its asset-purchase target by 50 billion pounds to 325 billion pounds on Feb. 9 to underpin the economy.

Gilts have lost of 1.8 percent this year, after returning almost 17 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt and U.S. Treasuries both lost 0.4 percent in 2012, the indexes show.

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