By Garth Theunissen March 4 (Bloomberg) -- U.K. government bonds rose after a report showed U.K. house prices fell more than estimated last month, indicating the economic recovery may not be strong enough to withstand a rise in the Bank of England’s interest rates. The Halifax House Price Index fell 0.9 percent last month, lower than the 0.5 percent drop forecast in a Bloomberg survey, the mortgage unit of Lloyds Banking Group Plc said in London today. U.S. employers probably added the most jobs since May, with nonfarm payrolls forecast to have increased by 196,000 in February, according to a Bloomberg survey of economists before today’s Labor Department report. “Worse-than-expected economic data would persuade the BOE to be less hawkish on rates,” said Wilson Chin, a senior interest-rates strategist in London at HSBC Holdings Plc, Europe’s biggest bank by market value. Ten-year gilts yields dropped six basis points to 3.66 percent as of 12:55 p.m. in London. The 4.75 percent bond due March 2020 rose 0.445, or 4.45 pounds per 1,000 pound ($1,627) face amount, to 108.305. Yields on two-year notes were two basis points lower at 1.42 percent. Two-year gilts, typically more sensitive to interest-rate expectations, have slumped for six consecutive months on bets rates will need to rise to curb an inflation rate that almost twice the government target. Policy maker Andrew Sentance has led calls for the central bank to increase borrowing costs since June and last month voted for a 50 basis-point increase. Short Sterling Minutes from the bank’s Feb. 10 meeting showed Spencer Dale joined Sentance and Martin Weale in voting for higher borrowing costs, though they favored a 25 basis-point rise. The next rate decision is scheduled for March 10. Short-sterling futures rose, reducing the implied yield on the contract expiring in December by one basis point to 1.67 percent. A lower yield shows investors reduced bets the Bank of England will raise interest rates. The pound was little changed against the dollar, dropping less than 0.1 percent to $1.6268. The British currency traded at 85.84 pence per euro, from 85.81 pence yesterday in New York. “The move in the pound today is mainly a consequence of people taking some profit because of the nervousness ahead of the non-farm payrolls data,” said Chris Huddleston, a trader at Investec Bank Plc in London. Investec expects the Bank of England to raise interest rates by 25 basis points in August, followed by another 25 basis-point increase in November, the brokerage said on March 2. The company had previously predicted that the first rate increase would be in November, it said. Money markets are favoring a 75 basis-point increase by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show. So-called Sonia rates indicate the first 25 basis-point raise will happen in May. --Editors: Matthew Brown, Mark McCord. To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source