LONDON MARKET: Government bonds set to beat the retreat

UK BONDS, already the world's worst-performing government bonds this year, may decline further this week as economic reports highlight concern about faster growth and higher interest rates.

"It could well take just one more piece of data to convince the Bank of England to move interest rates higher," said Dick Howard at Julius Baer Investments. "There's not anything on the horizon that will be helpful for gilts."

The benchmark bond fell last week, though it pared losses on Friday. Ten-year yields rose five basis points to close at 5.57 per cent, though that's down from Thursday's 13-month high of 5.64 per cent. Gilts are the worst big government bond investment in the world this year, with investors losing 3.72 per cent.

Reports and surveys aren't likely to give gilt prices any relief this week, analysts say, and may prompt investors to push yields back to their recent highs.

Consumers borrowed more in August, a report is expected to show on Wednesday. Rising consumer confidence was one reason cited by the BoE for raising rates earlier this month.

BoE policy-makers also said escalating house prices helped prompt them to increase borrowing costs. On Thursday Nationwide Building Society, one of the UK's largest mortgage lenders, will release its house price index for September.

Colt Telecom and Sema may lead UK stocks higher as investors seek companies with high growth prospects, such as those in telecommunications and technology. Sema, the computer services company, may gain as investors conclude that recent price declines left shares cheap. "Every period of weakness in this sector has provided a strong buying opportunity," Dresdner Kleinwort Benson analysts said.

Bank stocks are likely to gain after the Bank of Scotland made a hostile bid for National Westminster Bank, in the biggest- ever offer for a British bank. Barclays, Abbey National and Royal Bank of Scotland all climbed on speculation of further tie-ups in the banking industry.

Marks & Spencer may finally reverse the decline that has shaved 20 per cent off its shares since 15 July. "At some stage there has got to be real value in M&S," said Simon Smith at Capel Cure Sharp. "Management is getting a grip on the business, and even if it doesn't, it'll be a takeover target."

The FT-SE 100 index fell 1.7 per cent to 5,937.6 last week.