By Anchalee Worrachate Dec. 1 (Bloomberg) -- U.K. government bonds rose and the pound declined after a report showed the housing slump worsened, reinforcing speculation the central bank will cut interest rates this week to revive Britain’s ailing economy. The gains pushed the yield on two-year notes to a five-day low after property Web site Hometrack Ltd. said house values in Europe’s second-largest economy dropped in November to the weakest in almost three years. Lenders approved 32,000 loans for house purchase in October, matching the fewest since comparable data began in 1999, a report from the Bank of England showed. “Data this week will confirm the U.K. economic outlook is grim and growth remains firmly negative heading toward the end of the year,” said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. “Interest rates will fall fast in the U.K. That should continue to support short-dated bonds.” The yield on the two-year gilt dropped 17 basis points, the biggest one-day decline in yield since Nov. 20, to 2.02 percent as of 3:44 p.m. in London. The 4.75 percent security due in 2010 advanced 0.26, or 2.6 pounds per 1,000-pound ($1,485) face amount, to 104.06. The yield on the 10-year gilt fell 11 basis points to 3.66 percent. Yields move inversely to bond prices. Gilts also rose on concern the credit squeeze will cause more financial institutions to fail. London Scottish Bank Plc, a U.K. lender to customers with poor credit histories, was placed into administration after the company failed to find a buyer. U.K. Manufacturing U.K. manufacturing shrank at the fastest pace in at least 16 years in November as the deepening economic slump curbed demand for goods, the Chartered Institute of Purchasing and Supply said today. Its factory index, based on a survey of about 700 companies, was at 34.4, the least since the data began in January 1992, compared with a revised 40.7 in October. Gilts beat their European counterparts last month, handing investors a 4.6 percent return, compared with a gain of 4 percent on German bonds, according to Merrill Lynch & Co.’s U.K. Gilts and German Federal Governments indexes. The pound fell against all the 16 major currencies monitored by Bloomberg on speculation the Bank of England will cut interest rates further. It dropped to $1.4905, from $1.5377 last week. Against the euro, it weakened to 84.76 pence from 82.52 pence. The next key support level for the pound, a level where orders to buy the currency may be clustered, is $1.4845, according to Robin Wilkin, head of currency and commodity technical strategy at JPMorgan Chase Bank in London. The seizure in credit markets and an approaching recession sapped consumer demand in Britain, prompting the Bank of England to cut its key interest rate four times this year from 5.50 percent. Policy makers reduced the rate by 150 basis points to 3 percent in November, the lowest since 1955. Central Bank Rate The central bank’s next rate decision is Dec. 4, when policy makers will cut the benchmark rate by 1 percentage point to 2 percent, according to the median forecast of 60 economists surveyed by Bloomberg News. “We’ve seen the continuation of really grim news on the economy,” said Kenneth Wattret, a senior economist at BNP Paribas SA in London. “We don’t see much in the way of impediments to the central bank delivering another big rate cut. Our forecast is for a 100 basis-point cut.” The pound also declined as stocks in Europe and Asia fell, sapping demand for higher-yielding currencies. The FTSE 100 Index slid 4.7 percent. Against the yen, sterling depreciated to 139.76, from 146.89. Bets Against Pound Futures traders increased bets that the pound will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on the gain -- so-called net shorts -- rose to 42,431 on Nov. 18, from 39,838 a week earlier. The yield gap, or spread, between two- and 10-year gilts widened by seven basis points to 163 basis points today. The so- called steeper yield curve indicates traders are betting the economic slump will deepen, forcing the central bank to accelerate interest-rate cuts. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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