Dec. 23 (Bloomberg) -- U.K. gilts traded at their highest in 16 months on speculation the Bank of England has reached the end of a series of interest-rate increases.

The yield on the 10-year benchmark government bond has fallen by 0.53 percentage point since Aug. 5, when the central bank last raised its rate, on speculation a cooling housing market will curb growth. The minutes of the Bank of England's December monetary-policy meeting yesterday showed members voted unanimously to keep the benchmark rate unchanged.

``It is becoming much more clear that we are getting towards the end of the cycle,'' said Andre de Silva, deputy head of fixed- income strategy in London at HSBC Holdings Plc. ``There will be a good performance in the overall return in the gilt markets.''

The 5 percent gilt, due September 2014 rose 0.03, or 30 pence per 1,000-pound ($1,920) face amount, to 104.24 by noon in London, according to HSBC Holdings Plc. Its yield was little changed at 4.46 percent, after earlier dropping to 4.41 percent, its lowest since August 2003.

The Royal Institution of Chartered Surveyors said Dec. 21 its index measuring changes in U.K. house prices fell in the three months through November to the lowest since December 1992, suggesting a decline in the nation's property market is deepening.

Growth Revised

Gilts pared gains after a government report today showed the U.K. economy grew a revised 0.5 percent in the third quarter as services and construction expanded faster than previously forecast and manufacturing declined by less.

Quarterly growth was revised from the previous estimate of 0.4 percent and compares with 0.9 percent in the second quarter, the statistics office said today in its third estimate of economic expansion. Annual growth was unrevised at 3.1 percent.

The report ``took a little bit of a wind out of gilts' sails,'' said John Wraith, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``If anything yields are too low.''

Wraith predicts the yield on the 10-year gilt will rise to 4.5 percent by ``the middle of next year.''

Policy makers have kept lending costs at 4.75 percent for four straight months, after raising them from 3.5 percent since November last year to ward off inflation as the economy expanded at its fastest pace since 1999, in the second quarter.

10-year gilts yield 26 basis points more than equivalent U.S. Treasury notes. The gap, near its narrowest since Sept. 2003, has shrunk from a peak of 0.99 percentage points this year, as traders increase bets U.K. policy makers will hold their rate unchanged, as their U.S. counterparts raise their rate.

The Federal Reserve has raised its target rate for overnight loans to 2.25 percent from 1 percent in June.

The two-year note, typically the most sensitive to changes in interest rates yielded 36 basis points less than the Bank of England's target rate. The gap, which narrows as traders increase bets that policy makers will cut rates is at its lowest since last year.

To contact the reporters on this story: Steve Rothwell at srothwell@bloomberg.net

Last Updated: December 23, 2004 07:02 EST