Jan. 2 (Bloomberg) -- U.K. gilts declined, with 10-year yields climbing to the highest in two weeks, as U.S. lawmakers passed legislation to avert automatic spending cuts and tax increases, reducing demand for fixed-income assets as a haven.
The declines pushed 10-year yields up by the most in four months. The pound rose to its strongest level in 16 months against the dollar as a report showed manufacturing unexpectedly expanded at the fastest pace in 15 months in December, indicating the economy picked up strength toward the end of 2012, reducing the chances of another recession.
“It’s largely driven by the U.S.,” said Jason Simpson, an interest-rate strategist at Banco Santander SA in London. Congress has “managed to resolve a sufficient number of the key fiscal problems. It’s not the worst-case scenario unfolding,” he said.
The 10-year gilt yield rose 16 basis points, or 0.16 percentage point, to 1.99 percent at 4:30 p.m. London time. That was the biggest increase since Sept. 3. The 1.75 percent security fell 1.39 or 13.90 pounds per 1,000-pound ($1,630) face amount, to 97.92. Two-year yields increased eight basis points to 0.40 percent, the highest since May 16.
Ten-year yields may climb to 2.90 percent this year, Simpson said. Economists surveyed by Bloomberg News predict it will rise to 2.4 percent by the end of 2013.
The pound appreciated was little changed at $1.6252, after reaching $1.6381, the strongest level since Aug. 30, 2011. Sterling was also little changed at 81.18 pence per euro.
The U.S. House passed a bill undoing income tax increases for more than 99 percent of households, giving a victory to President Barack Obama even as Republicans vowed to fight him in coming weeks for spending cuts in exchange for raising the debt ceiling. The measure was carried with a 257-167 vote.
A gauge of British factory activity rose to 51.4 from a revised 49.2 in November, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today. The median forecast of 29 economists in a Bloomberg News survey was for a reading of 49.1, unchanged from November’s initially reported level. A reading above 50 indicates growth.
The Purchasing Managers’ Index for the U.K. has recovered from a three-month low of 47.3 in October. A report tomorrow will show construction improved in December even as the gauge stayed below the 50 level that marks expansion, according to a survey of economists.
“If the global backdrop continues to improve then the pound will benefit,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “The U.K. data is also a feature and the PMI number is encouraging.”
Sterling has gained 1.9 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.1 percent and the dollar fell 3.3 percent.
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