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boeLONDON: Yields on 10, five and two-year British government bonds fell to seven-month lows on Friday as worries about the Greek debt crisis and weak UK data raised the appeal of safe-haven assets like gilts and Bunds.

September gilt futures settled 60 ticks higher on the day at 121.25, just off a newly-set contract high of 121.30 and broadly in line with the equivalent German Bund future which rose by 70 ticks.

Agreement on the terms of a second rescue deal for heavily-indebted Greece appeared no closer, giving a lift to less risky assets like gilts and Bunds.

The European Central Bank rejected any debt restructuring for Greece that was not "purely voluntary", while Germany insists private creditors will have to share the burden of any new rescue package.

"There is still some nervousness with regard to the European debt situation and concerns about the global recovery and whether that is sustainable," said Credit Agricole strategist Orlando Green. "It was very much a risk-averse day."

In the cash market, 10-year gilt yields  fell by 5 basis points on the day to 3.22 percent, just off the seven-month low of 3.217 percent set at 1503 GMT.Ten-year Bund yields fell even further, widening the spread versus gilts by around two basis points to 26 basis points.

Five-year and two-year gilt yields both fell to new seven-month lows at 1.759 percent and 0.804 percent respectively.

Five-year gilt yields have fallen by nearly a full percentage point from their February peaks this year, while two-year yields have dropped by three quarters of a percentage point as market expectations of a Bank of England rate rise have been pushed back to 2012 "Core Europe is doing well because of risk concerns," said Lloyds strategist Eric Wand."The general backdrop is relatively supportive of fixed income at the moment, particularly because there is a lot of concern around Greece."

Global growth worries pushed major stock markets into their fifth weekly loss in six weeks, with mining companies among the worst performers after data showed Chinese export growth slowed in May.European shares fell by more than 1 percent on the day.

Gilt futures pared early gains immediately after the release of UK industrial output data, then rapidly recovered as traders struggled to draw an underlying trend from numbers distorted by an extra public holiday which some forecasters had failed to factor in and Japan's earthquake.

Factory output fell at its fastest pace in two years, but there had been an unusually wide range of forecasts circulating in the market before the release of the data due to the special factors affecting the data.

A separate survey from the Bank of England showed Britons expect inflation over the coming year to be slightly lower than they did three months ago.The domestic focus shifts next week to inflation data on Tuesday, jobless figures on Wednesday and retail sales numbers on Thursday.

Copyright Reuters, 2011

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