Oct. 31 (Bloomberg) -- The difference in yield between two- and 10-year U.K. bonds, already at the most in more than a decade, may widen as a looming recession prompts the Bank of England to cut interest rates, according to UniCredit Markets & Investment Banking.

The spread rose 11 basis points this week and was at 160 basis points today, the most since September 1996, after reports showed consumer confidence and house prices plunged this month as the financial crisis spooked British shoppers. The yield difference may jump to 170 by the end of the year as investors favor-shorter dated notes, according to Giuseppe Maraffino, a bond strategist at Unicredit, a unit of Italy's largest lender.

``We're expecting aggressive easing by the Bank of England and this should support the short end,'' Maraffino said in a telephone interview from Milan today. ``There's room for the spread to widen further,'' he said, adding that the central bank will likely cut interest rates by 75 basis points at each of its next two policy meetings.

The pound slumped and U.K. bonds jumped this month even as Prime Minister Gordon Brown said he is ready to increase spending and borrowing to shore up the economy, the second-largest in Europe. Brown acknowledged that the U.K. is tipping into recession for the first time in 17 years. The economy shrank in the third quarter.

The Bank of England will cut its 4.5 percent benchmark rate by 50 basis points on Nov. 6, according to the median forecast of 57 economists surveyed by Bloomberg. Four economists said they expected the bank to cut rates by a full percentage point.

Yield Spread

The spread between two- and 10-year yields jumped more than 100 basis points since Sept. 30 as investors reduced their inflation expectations, with the spread between the five-year gilt and its index-linked counterpart falling to the least since at least 1996. The so-called breakeven rate was at 1.06 percentage points, from 1.38 percentage points a week ago.

Investors increased holdings of shorter-dated notes, which are more sensitive to the outlook for monetary policy, as they bet the economic slump will help move inflation closer to the Bank of England's target. Consumer-price inflation accelerated to 5.2 percent last month, the fastest in a decade.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: October 31, 2008 12:50 EDT