Gilts Decline as U.K. Growth Signs Reduce Demand for Safety

U.K. government bonds fell this week, with yields climbing to the highest level in two months, as signs the economy is emerging from recession reduced demand for safer investments.

Gilts dropped for the first time in three weeks as data showed U.K. industrial production rose the most in 25 years and indexes of services and manufacturing activity both beat economists’ forecasts. U.K. government securities also declined as the European Central Bank said it would buy euro-area bonds to help contain the region’s debt crisis. The pound fell for a fourth week against the euro.

“There’s been slightly better activity data, which is negative for gilts,” said Jason Simpson, an interest-rate strategist at Banco Santander SA in London. “The ECB bond-buying plan has also triggered a risk-on move, which has further undermined gilts.”

The yield on the 30-year bond climbed eight basis points, or 0.08 percentage point, this week to 3.03 percent at 5 p.m. in London yesterday after rising to 3.14 percent, the highest level since July 5. The 4.5 percent bond due in December 2042 fell 1.975, or 19.75 pounds per 1,000-pound face amount, to 129.05.

The change in 10-year gilt yields was distorted as the U.K. switched to a new benchmark bond during the week.

Industrial production rose 2.9 percent in July, the most since February 1987, after falling 2.4 percent in June, the Office for National Statistics said yesterday. An index based on a survey of purchasing managers in the services industry climbed to 53.7 in August, Markit Economics and the Chartered Institute of Purchasing and Supply said Sept. 4, beating the forecast of 51.2 in a Bloomberg survey. A figure over 50 signals growth.

Bond Buying

The ECB’s bond-buying plan will focus on government notes with maturities of one to three years, Draghi said Sept. 6 at the central bank’s policy meeting in Frankfurt.

Gilts returned 3.3 percent this year through Sept. 6, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.7 percent, and U.S. Treasuries earned 2.1 percent.

The pound dropped 0.7 percent this week to 79.85 pence per euro, after declining to 79.94 pence, the weakest level since July 5. The U.K. currency rose 1 percent to $1.6016, climbing above $1.60 for the first time since May 16.

Sterling has appreciated 1.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar weakened 2 percent, and the euro declined 3.4 percent.

The U.K. will sell 1.25 billion pounds of inflation-linked bonds due in March 2034 on Sept. 11, and 3.5 billion pounds of 10-year securities on Sept. 13.

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