By Anna Rascouet Jan. 4 (Bloomberg) -- The U.K.’s two-year government bond fell and the pound rose to a two-week high as an increase in mortgage approvals added to evidence the nation’s economy is recovering from the recession. The drop in the security drove the yield to almost the highest level in six months as the FTSE 100 Index of stocks rose in its first trading day of the year. Lenders granted 60,518 loans to buy homes, compared with 57,718 in October, the Bank of England said today in London. The median of 17 forecasts in a Bloomberg survey was for 58,000. “There is reasonable evidence that is helping stocks, and that would normally suppress gilts,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “Generally data has been quite firm.” The yield on the two-year gilt increased 2 basis points, or 0.02 percentage point, to 1.33 percent at 12:08 p.m. in London, after earlier advancing to 1.37 percent, within 7 basis points of a six-month high. The 3.25 percent security due in December 2011 fell 0.05, or 50 pence per 1,000-pound ($1,621) face amount, to 103.64. The 10-year note yield was little changed at 4.02 percent. The Bank of England will buy today 1.7 billion pounds ($2.8 billion) of bonds maturing between 2020 and 2034. The bond buying program was implemented in March as part of efforts to lower borrowing costs. “Once we’re through the buybacks today, gilts will struggle,” McCormack said. The pound rose 0.4 percent to $1.6222, from $1.6151 at the end of last week. Sterling touched $1.6241, the highest level since Dec. 18. It weakened 0.2 percent to 88.84 pence per euro. U.K. manufacturing expanded in December at the fastest pace in more than two years, adding to signs the economy is recovering from the recession. The Chartered Institute of Purchasing and Supply and Markit Economics said today in London a gauge based on a survey of companies climbed to 54.1 from 51.8 in November. The median estimate of 21 forecasts in a Bloomberg survey was for a reading of 52. Readings above 50 indicate expansion. To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net

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