U.K. government bonds snapped a five- day decline after a report showed a measure of construction fell more than estimated in June, adding to speculation that the Bank of England will keep interest rates at a record low. Two-year notes rose after the gauge showed confidence weakened “sharply” last month to the lowest level since December, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said in a report today in London. The pound appreciated against the euro for the first time in six days, recovering from a 15-month low. “The U.K. economy is going through a lean patch and there’s a realization that rates will stay lower for longer,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a researcher that counts central banks among its subscribers. “That’s flattening the yield curve.” The yield on the 10-year gilt declined two basis points to 3.37 percent as of 10:32 a.m. in London. The 3.75 percent security due September 2020 rose 0.14, or 1.40 pounds per 1,000- pound ($1,612) face amount, to 102.99. Two-year note yields were little changed at 0.81 percent. Worsening economic growth has prompted traders to reduce bets on higher U.K. interest rates, with the implied yield on short-sterling futures expiring in March falling one basis point to 1.02 percent, down from a nine-month high of 2.08 percent in February. Short sterling futures are used by analysts to gauge the future trajectory of borrowing costs between banks. Rates Bets Investors are betting the central bank will raise borrowing costs next May, according to forward contracts on the sterling overnight interbank average, data from Tullett Prebon Plc show. As recently as February, traders were betting on a rate increase in May of this year, the data showed. The measure of U.K. building activity based on a survey of purchasing managers slipped to 53.6 from 54 in May, the report, published on Markit’s website, showed. The reading was below the 53.8 median estimate of economists surveyed by Bloomberg, though it stayed above 50, which indicates expansion. Sterling gained versus all but two of 16 major peers tracked by Bloomberg, climbing most against the Swiss franc, after data showed U.K. job creation accelerated in June. The Reed Job Index rose to 125 from 121 in May as insurance and engineering companies increased hiring, the London-based company, which runs Britain’s largest recruitment website, said in a report today. Pound Gains The pound appreciated 0.3 percent to 90.12 pence per euro. It weakened to 90.84 pence on July 1, the lowest since March 2010. Sterling gained 0.2 percent against the dollar to $1.6113 while it was little changed at 129.93 yen. “Any sign that employment prospects are improving is a good sign but we’re still cautious on the growth outlook for the U.K. economy,” said Sarah Hewin, a senior economist at Standard Chartered Bank in London. “The Bank of England isn’t likely to raise interest rates for some time. Rates staying on hold for a prolonged period is likely to continue pulling sterling weaker.” A separate report by Lloyds Bank Corporate Markets showed that 13 percent of employed respondents in a survey of 2,000 consumers from June 17-26 said they felt there had been an improvement in job security, while 34 percent said there had been a deterioration. 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

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