July 11 (Bloomberg) -- U.K. gilts posted a fourth weekly gain on concern the economy may be tipping into a recession and amid signs credit-market losses are deepening, heightening speculation the Bank of England will cut interest rates.

The yield on the 10-year government bond was near the lowest level in seven weeks as U.K. policy makers left the benchmark rate unchanged yesterday for a third month to combat inflation. Fannie Mae and Freddie Mac, the biggest providers of financing for U.S. home loans, slumped for a third day on concern they may need to be rescued by the government.

``The situation is deteriorating quite rapidly, and the credit crunch means this won't blow over any time soon,'' said Don Smith, a fixed-income strategist at ICAP Plc, the world's largest broker of transactions between banks. ``The next policy move by the Bank of England is more likely to be downward than upward. I'm bullish on gilts in the longer term.''

The yield on the two-year note rose 3 basis points to 4.88 percent by 5:21 p.m. in London, leaving it 9 basis points lower in the week. Four consecutive weeks of gains made it the longest winning streak since January. The 4.75 percent security due June 2010 rose 0.18 from last week, or 1.8 pounds per 1,000-pound ($1,990) face amount, to 99.77.

The yield on the 10-year gilt climbed 3 basis points to 4.90 percent, down 6 basis points in the week. Yields move inversely to bond prices.

The pound rose 0.6 percent against the dollar to $1.9897, from 1.9779 yesterday. It was steady against the euro, trading at 79.94 pence.

Rate Decision

The Bank of England kept its main rate at 5 percent, dismissing calls from unions and executives to lower it for the fourth time since December amid slumping house prices. Inflation reached 3.3 percent in May, exceeding the bank's 2 percent target.

Oil jumped more than $5 to a record $147.27 a barrel in New York on concern that Israel may be preparing to attack Iran and as a strike in Brazil and renewed militant activity in Nigeria threaten to cut supplies.

``With the oil price being where it is, inflation is still a problem,'' said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. Calyon predicts the central bank will keep rates on hold until the end of this year.

As the economic outlook is deteriorating, ``there's a risk that the Bank of England will have to cut rates,'' Green said.

Fannie, Freddie

Fannie Mae, which traded above $70 a share less than a year ago, slid as much as 49 percent to $6.68 in New York. Freddie Mac sank 51 percent to $3.89 and has lost 90 percent of its value in the past 12 months.

A government takeover of one or both companies is among options open to the Bush administration, said Joshua Rosner, an analyst with Graham Fisher & Co. Inc., who met with officials in Washington yesterday. Officials may push for the firms, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, to be placed in a conservatorship if their problems get worse, he said.

U.S. Treasury Secretary Henry Paulson, seeking to reassure investors, said the Bush administration wants to keep Fannie Mae and Freddie Mac as shareholder-owned companies, rather than placing them under government control.

Inflation expectations, as measured by the difference between regular and index-linked bonds, have risen this year. The 10-year U.K. breakeven rate, a gauge of market expectations of price growth, was 392 basis points today, from 319 basis points at the end of last year.

At the same time, investors are paring bets the central bank will increase rates. The implied yield on the December short- sterling futures contract was at 5.93 percent today, down 30 basis points this month.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@blommberg.net

Last Updated: July 11, 2008 12:38 EDT