By Beth Mellor Dec. 22 (Bloomberg) -- U.K. government bonds fell for a second day as stocks gained, damping demand for the relative safety of fixed-income assets. The declines drove the yield on the two-year note to its highest level in five days as the Dow Jones Stoxx 600 Index of Europe’s biggest equities reached a five-week high and the U.K.’s FTSE 100 Index extended its biggest annual rally since 1997. Sterling dropped against the dollar as data showed Britain’s economy contracted more than economists forecast. “There seems to be a reassessment in terms of asset classes with positive equity performance at the expense of bonds,” said Andre de Silva, global deputy head for fixed- income strategy at HSBC Holdings Plc in London. “This comes down to the perception that next year is going to be more robust. The dollar is also beginning to benefit.” The yield on the two-year gilt climbed 3 basis points to 1.22 percent as of 12:39 p.m. in London, its highest level since Dec. 17. The 3.25 percent security due March 2011 fell 0.07, or 70 euro cents per 1,000-pound ($1,601) face amount, to 103.92. The ten-year gilt yield advanced 3 basis points to 3.89 percent. Gilts pared their declines and the pound fell against the dollar after the U.K.’s Office for National Statistics said third-quarter gross domestic product shrank 0.2 percent from the second quarter, compared with a previous measurement of a 0.3 percent drop. The median forecast in a Bloomberg News survey of 24 economists was for a revision upwards to a 0.1 percent contraction. Market moves may be exaggerated today as trading volumes decline, according to HSBC’s de Silva. The pound fell below $1.60 for the first time in more than two months. The British currency declined 0.1 percent to $1.6017, after earlier trading at $1.5999, its weakest level since Oct. 15. It slid 0.2 percent to 89.19 pence per euro. To contact the reporter on this story: Beth Mellor in London at bmellor@bloomberg.net

Source