Gilt Yields Reach Record Low as Shrinking Economy Boosts QE Bets

Britain’s borrowing costs fell to record lows amid speculation the Bank of England will restart its program of asset purchases to boost the nation’s economy.

The pound reached a 10-week low versus the dollar, and two-, five- and 10-year bond yields fell to all-time lows after a report showed the U.K.’s gross domestic product shrank more than initially estimated in the first quarter. Bank of England Monetary Policy Committee member David Miles said in a speech in London today that “an exceptionally expansionary monetary policy” is appropriate to address risks of permanent damage to the economy and higher unemployment.

“Today’s numbers reinforce the weakness in the U.K. economy,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “GDP was a bit lower than expected, which does make it more likely that we will see more QE at some stage. Gilts will benefit the most from that.”

The nation’s two-year rate was one basis point, or 0.01 percentage point, lower at 0.25 percent at 4:10 p.m. London time after earlier falling to 0.228 percent, the lowest since Bloomberg began collecting the data in 1992. The price of the 2.25 percent security due March 2014 rose 0.01, or 10 pence per 1,000-pound ($1,569) face amount, to 103.555.

The 10-year gilt yield earlier tumbled to a record 1.738 percent, while five-year yields declined to 0.72 percent.

Britain’s GDP fell 0.3 percent from the fourth quarter, compared with a 0.2 percent drop estimated last month, the Office for National Statistics said today in London. Construction output fell 4.8 percent, the most in three years and more than the 3 percent initially estimated.

Debt Crisis Threat

The pound was little changed at $1.5694, after sliding to $1.5639, the lowest level since March 15. Sterling was at 80.23 pence per euro, from 80.19 yesterday.

The British currency may find support at its March low of $1.5603, according to data compiled by Bloomberg. Support refers to an area on a price graph where buy orders may be clustered.

Sterling has appreciated 4.6 percent in the past three months, the third-best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 5.9 percent and the yen advanced 8.5 percent.

Sterling fell yesterday as minutes of the central bank’s May meeting showed the decision to pause its so-called quantitative easing program, or QE, was “finely balanced” for some policy makers.

The MPC voted 8-1 at its May meeting to keep the target of its bond-purchase program at 325 billion pounds, the minutes released showed. The International Monetary Fund said two days ago that the central bank needs to inject more stimulus into the U.K. economy.

U.K. debt has returned 2.9 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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