By Gavin Finch Dec. 15 (Bloomberg) -- U.K. government bonds advanced after an industry report showed house prices extended declines in December and may lose a further 10 percent of their value next year as the recession batters Britain’s economy. The gains pushed the yield on the two-year note to the lowest level in 10 days as traders bet Bank of England policy makers will reduce their main interest rate by at least a quarter-percentage point to 1.75 percent when they meet on Jan. 8. Gilts rose last week after the U.S. Senate rejected a $14 billion rescue plan for automakers and lender HBOS Plc said bad loans will increase as the economy sputters. “There’s still an awful lot of concern about the outlook for the global economy and that’s keeping bonds very well supported,” said John Wraith, head of sterling rates product development in London at Royal Bank of Canada. “The rally in gilts and government bonds worldwide will continue apace, with yields moving lower over at least the next couple of months.” Investors should favor U.K. gilts over German and U.S. government securities, Wraith said. He declined to give a yield forecast. The yield on the two-year gilt fell nine basis points to 1.61 percent by 12 p.m. in London, the lowest level since Dec. 4. The price of the 4.75 percent security due June 2010 rose 0.12, or 1.2 pounds per 1,000-pound ($1,495) face amount, to 104.56. The yield on the 10-year bond slipped 11 basis points to 3.48 percent. Bond yields move inversely to prices. Deteriorating Economy The average house price advertised by sellers fell 2.3 percent on the month, the operator of the U.K.’s biggest residential property Web site said today. Asking prices have dropped more than 10 percent from the peak in May and will fall by the same amount next year, Rightmove Plc said. Government bonds may extend gains this week as inflation, unemployment and retail sales reports signal a deteriorating economy, said Stuart Thomson, international fixed-income manager in Glasgow at Ignis Assets Management. The U.K. will report 44,500 new jobless claims in November, rising from 36,500 in October, according to the median forecast of 24 economists surveyed by Bloomberg. U.K. bonds returned 8.1 percent this year, according to Merrill Lynch & Co.’s U.K. Gilts Index. That compares with 6.9 percent for European bonds and more than 12 percent for U.S. Treasuries, according to Merrill Lynch’s EMU Direct Government and Treasury Master indexes. The U.K. pound declined to a record low against the euro. It weakened to 90.09 pence, the lowest level since the European currency’s debut in 1999, from 89.48 pence on Dec. 12. Against the dollar, the pound advanced to $1.4949, from $1.4944. “We stick to our view that the pound will breach the level of 90 pence per euro this week,” currency strategist Michael Klawitter at Dresdner Kleinwort in Frankfurt and analyst Peter Schaffrik in London, wrote in a research note e-mailed today. To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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