U.K. government bonds fell and the pound advanced as stocks climbed, curbing demand for the safest assets. Gilts’ decline pushed the 10-year yield up from near the lowest in more than 14 months. The pound rose against the dollar as the appetite for riskier assets damped demand for the U.S. currency, and the benchmark FTSE 100 Index of shares climbed as much as 2.6 percent, the most in more than a month. Gilts declined at a slower pace than German bunds after the U.K. sold 3.25 billion pounds ($4.9 billion) of 3.75 percent bonds due 2020, with demand increasing from the previous sale. “Equities are up today, it’s a risk-on day, so yields are higher across the bond markets,” said Chiara Cremonesi, a strategist at UniCredit SpA in London. “The bid-to-cover ratio for today’s auction is really strong and gilts should continue to outperform.” The 10-year gilt yield rose four basis points to 3.36 percent as of 2:43 p.m. in London. The 4.75 percent security maturing in March 2020 slid 0.33, or 3.3 pounds per 1,000-pound face amount, to 111.41. The extra yield investors demand to hold 10-year gilts rather than benchmark German bunds slid 2 basis points to 76 basis points. The Debt Management Office received bids for 2.45 times the amount of 2020 bonds on offer today, compared with 1.86 at the previous sale of the securities on June 9. The average yield was 3.467 percent, from 3.633 percent at the previous auction. Budget Cuts Prime Minister David Cameron’s efforts to reduce the budget deficit have helped boost gilts’ relative returns versus other government securities. U.K. government bonds made 3.7 percent since the May 6 election while German bonds returned 2.4 percent over the same period, according to indexes complied by Bloomberg and the European Federation of Financial Analysts’ Societies. The European Union said today the U.K. has taken effective action to rein in the budget deficit without “suffocating” the economic recovery.” Concern the cuts would slow growth helped send the 10-year yield to 3.31 percent yesterday, within one basis point of the lowest since April 2009. The pound strengthened 0.3 percent to $1.5180, after reaching $1.5229 two trading days ago, the strongest level since May 4. It was little changed at 82.82 pence per euro. It climbed 0.3 percent to 133.25 yen. The gains against the Japanese currency may be short-lived, according to Bank of Tokyo-Mitsubishi UFJ Ltd., which recommended selling the pound versus the yen because U.K. economic growth may slow, forcing policy makers to retain “loose” monetary policy as the government cuts spending. Interest Rates Investors should aim for an 8 percent decline of the pound against the yen to 123, Lee Hardman, a currency strategist in London, said today in a research report. The Bank of England will keep its benchmark interest rate on hold at a record low until at least May 2011 as the spending cuts weigh on the economic recovery, the British Chambers of Commerce said. Policy makers will hold the rate at 0.5 percent when they announce the result of their monthly meeting on July 8, according to all 60 economists polled by Bloomberg. “We now have in place a very tough fiscal policy and this makes the risks of a double-dip recession even greater,” BCC Chief Economist David Kern told reporters in London. “It makes it more necessary, policy-wise, for the Bank of England to keep interest rates low.” To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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