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Gilts Fall as Reports Signal U.K. Economy Strengthening

U.K. government bonds fell this week, with 10-year yields rising the most since October, as data signaled the economic recovery is gaining strength, weakening the case for more bond-buying by the Bank of England.

Ten-year gilts dropped for a sixth straight day yesterday, the longest stretch of declines since October 2011. Standard & Poor’s lowered the U.K.’s credit-rating outlook to negative from stable on Dec. 13, citing weak economic growth and a worsening debt profile. An industry group yesterday predicted house prices will increase next year and a Bank of England official said the economy will improve in 2013.

“It’s more to do with the economy” rather than the rating outlook, said Annalisa Piazza, a strategist at Newedge Group in London, referring to the rise in yields. “The rating agencies are obviously concerned that there will be a cyclical impact on the fiscal consolidation given the reduced receipts because of the lower activity. That’s why they need to be alert.”

The 10-year gilt yield climbed 12 basis points, or 0.12 percentage point, this week to 1.86 percent at 5 p.m. in London yesterday. That’s the biggest increase since the period ended Oct. 19. The 1.75 percent bond due in September 2022 declined 1.06, or 10.60 pounds per 1,000-pound ($1,614) face amount, to 99.005.

Economic Data

U.K. home values will increase 2 percent in 2013 after a 1 percent gain this year, the Royal Institution of Chartered Surveyors said in a report yesterday. Data according to the Office for National Statistics this week showed jobless claims unexpectedly declined in November, while the Confederation of British Industry said its gauge of manufacturing orders improved in December.

Bank of England Markets Director Paul Fisher told Reuters two days ago that the U.K. economy will pick up slowly during next year and the deflation risk has subsided, reducing the need to “do asset purchases in large scale.”

Policy makers are due on Dec. 19 to release the minutes of their Dec. 6 meeting, when they maintained the central bank’s asset-purchase target at 375 billion pounds and the key interest rate at a record low of 0.5 percent.

The pound strengthened for a second straight week against the dollar, rising 0.7 percent to $1.6145. It depreciated 1 percent to 81.44 pence per euro.

The pound has gained 1.2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.5 percent and the dollar dropped 3 percent.

U.K. gilts handed investors a loss of 0.9 percent this month through Dec. 13, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 0.3 percent, while Treasuries declined 0.5 percent.

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