Benchmark rates dropped to the lowest level this month as signs the U.S. recovery is uneven underpinned demand for safer assets. The pound weakened for the first time in three days against the euro after German industrial production increased the most in a year. Sterling is still headed for its biggest weekly gain in more than three years against the dollar. The U.K. sold 2.5 billion pounds ($3.9 billion) of bills. “The thing that dominates the day will be waiting for and reacting to the payroll numbers,� said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “Bad numbers shouldn’t be positive for anything really but they are as they lead to easier monetary policy� which supports gilts. The 10-year gilt yield fell five basis points, or 0.05 percentage point, to 1.98 percent at 11:50 a.m. London time after dropping as much as six basis points, the most since May 31. The 1.75 percent bond due in September 2022 rose 0.395, or 3.95 pounds per 1,000-pound face amount, to 98.09. The yield fell to 1.97 percent, the lowest since May 31. Gilts handed investors a loss of 0.9 percent this year through yesterday, according to the Bloomberg World Bond Indexes. German bonds and U.S. Treasuries both declined 0.8 percent, the indexes show. U.S. Payrolls The U.S. Labor Department will say American employers boosted payrolls by 163,000 in May after adding 165,000 workers the previous month, according to a Bloomberg News survey before the data is released at 8:30 a.m. in Washington. The unemployment rate held at a four-year low of 7.5 percent, a separate survey showed. Sterling fell 0.2 percent to 85.09 pence per euro after appreciating to 84.77 pence yesterday, the strongest since May 21. The pound slipped 0.2 percent to $1.5577, trimming this week’s gain to 2.5 percent, still the most since October 2009. Industrial production in Germany jumped 1.8 percent in April from the previous month, the biggest gain since March 2012. Economists surveyed by Bloomberg forecast no change. The pound may extend gains versus the dollar if it closes above last month’s high of $1.5606, according to Richard Adcock, a technical strategist at UBS AG in London. The moving average convergence/divergence pattern, which tracks the difference between a shorter- and longer-term moving average, remains above zero, suggesting further gains, Adcock wrote in a note to clients. The next “significant� resistance level is at $1.5789, he wrote, referring to an area where sell orders may be clustered. The pound has strengthened 5 percent in the past three months, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.8 percent and the euro strengthened 2.1 percent. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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