Gilts Decline as U.K. Manufacturing Expands; Pound Strengthens

Gilts declined, extending two months of losses, as U.K. reports showing gains in manufacturing and house prices damped demand for the safety of the nation’s government debt.

Thirty-year bonds dropped for a second day after a gauge of Chinese manufacturing advanced to a one-year high, adding to signs the global economy is gaining momentum. Euro-area finance ministers last week agreed to provide 500 billion euros ($665 billion) in bailout funds to combat the region’s debt crisis. The pound rose to a four-month high against the dollar.

“The data we have here today and out of China, plus the news on European bailout funds bode well for risk assets,” said Vatsala Datta, an interest-rate strategist at Lloyds Banking Group Plc in London. “Yields in core bond markets may have further to rise in the near-term.”

The yield on the 10-year gilt climbed two basis points, or 0.02 percentage point, to 2.22 percent at 4:07 p.m. London time after increasing 23 basis points during February and March. The 4 percent bond due March 2022 dropped 0.150, or 1.50 pounds per 1,000-pound ($1,603) face amount, to 115.790. Thirty-year yields rose one basis point to 3.38 percent.

Ten-year yields will increase to 2.55 percent by year-end, according to a Bloomberg News survey of financial companies with the most recent projections given the heaviest weightings.

House Prices

U.K. house prices increased in March for the first time in 21 months as buyers rushed to beat the expiration of a property-tax exemption and prices in London gained, Hometrack Ltd. said.

A gauge of British factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, rose to 52.1 in March from a revised 51.5 in February. The median forecast of economists surveyed by Bloomberg was for a decline to 50.7 from an initially reported 51.2. A reading above 50 indicates expansion.

Gilts have lost 1.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries dropped 1.3 percent, and German bonds rose 0.3 percent.

The pound appreciated 0.1 percent to $1.6018 after rising to $1.6063, the highest since Nov. 14. The U.K. currency gained 0.2 percent to 83.08 pence per euro.

European Unemployment

Sterling climbed for a third day against the euro after a European report showed unemployment increased to a 14-year high in February, sapping demand for the single currency.

The jobless rate in the euro region rose to 10.8 percent from 10.7 percent in January, the European Union’s statistics office in Luxembourg said. That’s the highest since June 1997, before the euro was introduced.

The pound has strengthened 0.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro is little changed, and the dollar declined 2.9 percent.

Futures traders trimmed bets that sterling will weaken versus the dollar. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain was 11,110 on March 27, compared with 15,852 a week earlier, according to figures from the Commodity Futures Trading Commission.

The pound may be heading toward the Oct. 31 high of $1.6167 after it rose to the highest level in six months, with the currency staying above its 200-day moving average of $1.5851, according to data compiled by Bloomberg.

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