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Gilts Advance This Week on Fiscal-Cliff Concern; Pound Gains

U.K. 10-year gilts rose this week, with yields falling the most in a month, as speculation U.S. lawmakers will fail to reach agreement in time to avoid the so-called fiscal cliff boosted demand for safer assets.

Ten-year yields fell to the lowest in more than two weeks today as concern increased whether U.S. leaders will find a way to avoid the more than $600 billion in spending cuts and tax increases that will start in January. The pound strengthened against all its 16 major counterparts before U.K. reports next week that economists say will show improvement in house prices, consumer credit and mortgage lending.

“The rally in gilts in the past week can largely be attributed to concerns about the U.S. fiscal cliff,” said Abhishek Singhania, a fixed-income strategist at Deutsche Bank AG in London. “Poor liquidity conditions have also had an effect.”

The 10-year gilt yield fell six basis points, or 0.06 percentage point, this week to 1.82 percent at 5 p.m. London time. The rate was little changed today after dropping as much as four basis points to 1.77 percent, the lowest since Dec. 11. The 1.75 percent bond due in September 2022 traded at 99.36.

U.S. congressional leaders plan to meet with President Barack Obama today and House Republicans said they will convene Dec. 30 as lawmakers seek to avoid the spending cuts and tax gains.

Annual Return

Gilts returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.4 percent and Treasuries earned 2.2 percent.

The pound strengthened 0.5 percent to 81.82 pence per euro after gaining as much as 0.7 percent, the biggest increase since Dec. 6. Sterling appreciated 0.4 percent to $1.6157.

Mortgage approvals rose to 54,000 last month from 52,982 in October, according to a median forecast of 15 analysts in a Bloomberg News survey, before the data is released on Jan. 3.

Bank of England Deputy Governor Charlie Bean said last month the central bank’s Funding for Lending program, which started in August, is showing a “clear sign” of feeding through to households.

The Nationwide Building Society will say U.K. home prices fell 0.9 percent in December from a year ago, less than November’s 1.2 percent drop, according to a Bloomberg survey before the data is released next week. An index of construction output climbed to 49.5 from 49.3, a separate survey showed ahead of the Jan. 3 report from Markit Economics.

“We see some signs of the U.K. economy stabilizing,” said Geoffrey Yu, a currency strategist at UBS AG in London. “We expect the pound to continue to outperform the euro next year.”

The pound has appreciated 1.5 percent in 2012, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 0.7 percent and the dollar fell 2.8 percent.

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